TD Securities maintains its bearish outlook for the USD, suggesting that the currency's recent free fall, following a positive inflation report, marks the beginning of a broader downward trend expected for the second half of 2023 and most of 2024.
Key Points
Advocating USD shorts: TD has been advocating for USD shorts since the positioning-induced rally in May. The bank believes the recent price action is the start of a broader bearish trend in the second half of 2023.
Medium-term drivers: TD assesses several medium-term drivers, including global growth and yield curve dynamics, front-end rate momentum and relative central bank policy, and volatility and valuation mechanics. These drivers largely lean against the USD, supporting TD's updated outlook that the USD has much room to fall through the second half of 2023 and even through most of 2024.
Unwinding of global recession hedges: TD suggests that the recent outperformance of G10 currencies relative to EM currencies likely rests in the unwinding of legacy global recession hedges.
China's data and EM carry trades: China's upcoming data release will also draw attention, where positive data could reinforce the outperformance of Asia/EM equities. TD likes KRW longs versus CNH and USD, sees renewed life in EM carry trades, and still prefers long JPY exposure as USDJPY remains rich to fair value.
CADNOK downside: The break of the 200-day moving average opens up more CADNOK downside.
Summary
TD Securities maintains a bearish stance on the USD, viewing the recent fall as the onset of a broader negative trend extending into 2024. The bank identifies several medium-term drivers that lean against the USD, reinforcing its projection. Furthermore, TD highlights the unwinding of global recession hedges and China's data release as key elements to watch.
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