USD starts the New Year on the back foot - TDS

The dollar starts the New Year on the back foot and for the narrow DXY, this move comes on the heels of a 10% drop throughout 2017 that marks the biggest annual decline since 2003, explains Mark McCormick, North American Head of FX Strategy at TDS.

Key Quotes

“Indeed, the performance of 2017 was one of seven years in the past 47 where it dropped at least 10%. We believe this dynamic reflects the ongoing regime shift in the global foreign exchange market, spurred in part by global reflation and central bank normalization. Some of the factors potentially underpinning further dollar weakness at the start of the year.”

“So what’s the trade?

• We remain firmly in the USD bear camp at the start the year. This view continues to rest on the links between global reflation, the closure of output gaps outside the US and the ongoing regime shift in global capital flows.
• The recent recovery in the data momentum does not differ much from historical patterns, but we note it has reached a point that often signals a reversal in momentum. Further loss of momentum, coupled with our view that the Fed is likely to pass on March and hike again in June leaves room for a more in-depth correction.
• On our current estimates, EURUSD would start to look stretched around 1.2375, indicating there is some room to push higher in the short-run. Against this backdrop, a weaker dollar environment is likely a tide that will lift all boats in the G10, although it is noteworthy that NZD, AUD and GBP look a bit stretched against our HFFV estimates. At the same time, CAD could get some extra support on the recent break of $60/bbl in oil while a broader pullback in the greenback would also encourage upside risks to CAD. However, we are cautious about chasing CAD strength too much beyond mid-month as NAFTA risks will resurface at the end of January.
• We like holding short exposure into this week’s NFP release since a weak number should intensify the downward bias. Nonetheless, even on a good number, we would look to fade topside and use rallies as selling opportunities throughout the first month of trading.”