TD citing narrowing rate differentials now that the Fed has started backing off on tightening
In summary from the note:
- Yield advantage the US has over DM has shrunk
- USD had gained on the differentials but is now expensive
- and is perhaps now vulnerable to the change of direction
- "... dollar is overvalued …. losing the growth and equity support that it had plugging the valuation gap last year"
- "Rates outside of the U.S. are cheap and they will essentially move higher as policy outside the U.S. starts to normalize"
TD look for the USD lower in a 3 to 6 month horizon
- "If U.S. rates are topping out because the Fed is essentially done, then there's room for catch-up, which would see the dollar weaken against G-10 currencies"
TD like long AUD/USD, adding that the markets are taking the wrong view on the RBA by expecting the Bank to cut instead of hike
