USD: USD 'Conundrum' Is Temporary - Credit Agricole
US data has been comfortably exceeding expectations, prompting the rates market to consider the possibility of the next hike being delivered as early as March, and a hike by May now looking more likely than not. However, it has had little positive impact on the USD, which appears to be carrying something of a political risk premium at the moment. Since US equities are still performing very strongly, we suspect this has most to do with the administration’s explicit aversion to a strong currency rather than the various recent controversies surrounding President Trump’s cabinet.
Ultimately, we suspect that this USD conundrum is temporary, as the link between data and the dollar should be restored as long as the Fed is able to conduct independent policy.
In the week ahead, the calendar is light given the President’s Day holiday on Monday, with home sales data being the main release of note for the remainder of the week.
The minutes from the January FOMC minutes should attract the most attention, even if their impact is likely to be moderated by Chair Yellen’s detailed assessment at the Congressional testimony this past week. More substance on the economic discussion should have a constructive tone since the Fed should have been quite happy with the latest activity data and a surge in business/consumer confidence. The minutes will also be an opportunity to gauge how much the regional Fed presidents were pushing to start the discussion of the balance-sheet policy.