ING: Trump impeachment to sink Australian dollar

See the latest Australian dollar analysis here:

Macro Morning

Via ING:

USD: Impeachment vote may have somewhat limited impact

The dollar has remained generally supported in early trading today as markets await new catalysts in the form of data releases or political developments in the US. On the latter,VP Pence has pledged to keep working with President Trump until the end of his mandate, therefore refusing to remove Trump from office through the 25thAmendment. This means that the Democrats will have to go through Congress (the first vote in the House is due today or tomorrow) for the impeachment process. For now, markets have not shown a high sensitivity to the recent political turmoil in the US and with only eight days before Biden’s inauguration, it appears the effective implications of a successfulTrump impeachment may be limited from a market perspective. Looking at the US calendar, the December NFIB Small Business Optimism will be released today and will be followed by a plethora of Fed speakers later in the day. Any policy-related comments should–in our view–go in the direction of ruling out any unwinding of monetary stimulus in the foreseeable future. With the Fed’srate expectations firmly at the bottom, any further rise in US yields will remain a function of rising inflation expectations or term premium, which leaves us confident on our bearish-dollar call.

It will certainly be the case that the AUD will sink short term if we see some of the expended protests warned about by the FBI. But the base case remains ahead, captured by UBS:

The US Dollar Index (DXY) has risen 0.75% since the start of the year amid an uptick in bond yields—10-year US Treasury yields today tested a ten-month high of 1.1580%—and expectations of further fiscal stimulus under a Biden administration and a unified Congress.But while near-term fluctuations are likely, we think the greenback’s downtrend should remain intact as long as global recovery prospects stay in focus. We expect further COVID-19 vaccine rollouts to support an economic and earnings rebound that should see the global economy expand by more than 6% this year. A wider economic recovery should improve the prospects for more procyclical currencies and lead to a corresponding decline in demand for safe-haven assets, such as the USdollar. In addition, we expect a focus on the twin US deficits—especiallyif significant additional stimulus is enacted—and a diminished realinterest rate differential to contribute to further greenback weakness. Ourcalculations signal that the US dollar is overvalued against a broad basketof currencies, and we think it will have to give up more of this premiumthan it already has.

David Llewellyn-Smith
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