USD: No hibernation for these bears - TDS

"If there was any doubt for fencesitters, the past few weeks has been a strong indictment of the USDs bearish prospects," TD Securities analysts explain.

Key quotes

Data surprises have pressed to new cyclical highs (helped by last Friday’s better CPI report) and the market is pricing in almost 3 Fed hikes this year, including a near certainty of a move in March (now our base case), yet the USD still can’t rally. The fact that the USD couldn’t sustain a move higher beyond the knee-jerk reaction of stronger CPI is very telling we think, particularly as the Fed’s most pressing concern has been the persistence of soft inflation.

Despite the positive data run, we think we are precisely in the cycle where what’s good for the US is good for the rest of the world. Even though USD bearish positioning looks skewed and technical measures even oversold, there isn’t a compelling reason to lean the other way just yet.

We acknowledge there will be fits and bouts of a relief rally and the catalyst for this will have to come from EUR profit taking as coalition talks in Germany may encounter stumbling blocks before the SPD vote on Sunday on whether to form another grand coalition with Merkel’s CDU party. Unless talks break down, we think a EUR dip should be somewhat shallow, with 1.22 as initial support followed by 1.2150.  Below this, 1.2090 should prove to be attractive for dip buyers.

Meanwhile, the US is flirting with government shutdown risk (January 19th is the deadline), and previous cases of such an event has seen the USD weaken. Given the politically charged climate, we suspect this is a probable outcome.