Level of US growth remains strong, USD selloff shallow – BAML

FXStreet (Barcelona) - According to Ian Gordon, FX Strategist at BofA-Merrill Lynch, the continued push of policy and rate divergence in USD’s favour implies that the recent dollar selloff has been shallow.

Key Quotes

“To us, the initial USD selloff post-FOMC was less interesting than the sharp snapback shortly thereafter. This suggested that despite the sizeable USD long positioning, the market was eager to use better levels to re-engage USD longs.”

“The recent slowdown in US data has raised some concern about continued USD strength not reflecting improving fundamentals.”

“However, it is important to remember that on a relative level basis, US growth is still expected to roundly outperform its G5 counterparts this year and next.”

“The general belief that much of the recent slowdown in US growth is due to transitory factors, combined with the continued push of policy and rate divergence in the USD’s favor has meant the recent USD pullback has been shallow.”

“Additionally, in the Fed’s view, the burden is on the data to shift it off course from hiking rates in mid 2015.”

“As Atlanta Fed President Dennis Lockhart (a centrist on the FOMC) said last week, to postpone raising rates until late 2015 would mean a shock hit the economy.”

“We continue to expect the USD to benefit as this process of growth and policy divergence plays out over the course of the year.”