While solid US data, stronger Fed rate expectations, and strong US stocks continue to underpin the dollar bull case, Nomura's Dominic Bunning and colleagues point out that historical trends surrounding US data shocks hint to negative risks for the USD over the next months. They identify Fed communication, AI-driven tech sentiment, stretched positioning, and possible changes in US employment data as important drivers.
The narrative of US exceptionalism appears weak.
"In recent weeks, the USD bull thesis has gained greater attention. USD gains are supported by strong US data and a repricing of Fed rate rises in the upcoming year. Despite a recent decline, US equities have been outperforming for the majority of the past few months, coinciding with a resumption of inflows into US capital markets.
"This broadening means the bar to more positive surprises is rising, and there is a growing possibility we are near to peak USD optimism."
"We examined the entire history of US Economic Surprise Index data and took into account instances where the index surpassed the 60 mark, where it has been lingering over the past week or so. We discovered 41 instances. After that, we looked at USD returns over the next week, two weeks, month, and three months in relation to all G10 currencies and as an equal-weighted index."
"We find that the returns become considerably more consistently negative across all performance windows when we raise the US Surprise Index criterion to a somewhat higher hurdle level of 70. This implies that the USD is about to go over into a period of growing downside danger.
"Most crucially for us, long USD positions and short positioning for other currencies are heading into area that could start to seem stretched, and the recent strength in US data surprises has historically been more strongly tied to future USD weakness than to strength."
The narrative of US exceptionalism appears weak.
"In recent weeks, the USD bull thesis has gained greater attention. USD gains are supported by strong US data and a repricing of Fed rate rises in the upcoming year. Despite a recent decline, US equities have been outperforming for the majority of the past few months, coinciding with a resumption of inflows into US capital markets.
"This broadening means the bar to more positive surprises is rising, and there is a growing possibility we are near to peak USD optimism."
"We examined the entire history of US Economic Surprise Index data and took into account instances where the index surpassed the 60 mark, where it has been lingering over the past week or so. We discovered 41 instances. After that, we looked at USD returns over the next week, two weeks, month, and three months in relation to all G10 currencies and as an equal-weighted index."
"We find that the returns become considerably more consistently negative across all performance windows when we raise the US Surprise Index criterion to a somewhat higher hurdle level of 70. This implies that the USD is about to go over into a period of growing downside danger.
"Most crucially for us, long USD positions and short positioning for other currencies are heading into area that could start to seem stretched, and the recent strength in US data surprises has historically been more strongly tied to future USD weakness than to strength."
