USD: Screening rich - TDS

Analysts at TDS suggest that the US dollar screens rich on their short-term valuation models, increasing the scope of a deeper correction this month.

Key Quotes

“The average overvaluation sits around 1.2-sigmas, which makes it about 0.5% rich. It looks much richer against global top-down drivers than cyclicals. Still, given that it has benefited little from the passage of tax reform (and other positive news seems priced in), a slight overvaluation leaves it vulnerable to shift in fundamentals or to a change in sentiment. In fact, a soft NFP print today could act as a catalyst for a more profound correction to start the year.”

“The dollar has traded rich for most of Q4, though it recently breached the 1- sigma level that typically signals turning points. The rolling t-stats also underscore that the global reflation theme remains the dominant one in G10FX, outpacing the other two themes. Recall, that our empirical results show the dollar maintains a negative beta to global reflation and the continuation of above-trend growth outside the US should keep the downtrend intact.”

“We believe the reduction of this risk premium mainly reflects the repricing of the tax plan and the modest growth upgrade for 2018 Following a shaky H117, the USD scored reasonably well on data surprises and growth momentum, with the latter likely benefitting from the passage of fiscal stimulus late last year. The roughly 3% rally in the dollar from the Sep lows to the Dec highs reflect a mix of positive data and policy surprises that our cyclical valuation model argue is now priced.”

“We also note that our positioning proxies show macro hedge funds and CTAs holding long dollar exposure. These indicators show a shift from short to long exposure over the past month, which we suspect partly reflects optimism on the tax plan and profit taking ahead of yearend. Still, the recent rally fizzed out ahead of the Dec Fed meeting, and it is telling that since then the dollar dropped 2.5% despite the string of positive news flow including the passage of the tax plan.”