US: Rising trade frictions will upset the outlook - Westpac

According to Richard Franulovich, head of FX strategy at Westpac, high and rising trade frictions will upset the US outlook via sentiment channels and a tightening of financial conditions but the prospect of pre-emptive Fed cuts matching market expectations (75bp by end-2020) remains dim.

Key Quotes

“Comparisons with the 75bp in insurance cuts in 1995 and 1998 are misplaced; those episodes were associated with a more material cooling in wages and inflation than has recently been the case.”

“Recession risk remains manageable too; the 10yr-3mth curve is inverted but the ISM is above 50 and equities and credit have not deteriorated that much (yet).”

“It’s not clear that trade frictions and ongoing Fed cut speculation will adversely impact the USD anyway; the USD index has been enjoying a slow grind higher all year regardless whether trade tensions are rising as they are now or subsiding as they were through Q1. The global macro picture surely won’t be reassuring for a range of currencies in the unlikely event that the Fed cuts rates.”

“USD index likely finds support into 97.5 amid a continuing grind higher.”