The USD continued its consolidation overnight consistent with lower US rates. Indeed, the 10-year yield is trading near 2.43%, which is an 18bp drop from the recent high set in mid-September. A mix of geopolitical issues, negative news headlines and muddled economic data releases drove the recent short squeeze. The US economic data surprise index peaked in early September at 47 (which was nearly a full retracement of the year high set in January). However, the index plunged to 12.40 after a set of mixed data released over the past few weeks.
Specifically, we note the big “misses” in existing and pending homes sales, durable goods and the September releases of the ISM and Markit PMI indices. The result is that the spread between US data surprises and the rest of the G10 narrowed sharply over the past few weeks, spurring in part the mild correction in the USD.
Stretched positioning and short-term over-valuation also contributed to the move. Moreover, both index level and pulse (current minus trend) showed USD data surprises ranked fourth in our Macro Scorecard framework – behind NOK, CAD and AUD. (It is worth noting, though, the USD ranks third on the overall score).
We still expect further pullback in the USD given the DXY and other broad USD indices have overshot rate expectations but we look to use any pullback to buy USD on dips, especially against EUR, CHF and SEK (the three worst currencies according to our Macro Scorecard.
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