USD: Time To Be Selective In Longs; 2 Trades To Consider - TD

The greenback has surged since the surprise election of Donald Trump in early November. The broad trade-weighted nominal effective exchange rate is within striking distance of its all-time high set in 2002. It is also up 4% from over a year ago, though this pace is much smaller than the rallies seen over the past two years. The recent bounce nevertheless reflects a few interrelated factors that should continue to reinforce broad USD strength in 2017-H1. These include:

1. Rising real and nominal rates in the US against the rest of the majors 2. Divergence in business cycles and varying timeframes for closing output gaps and 3. Scope for fiscal stimulus that amplifies some of the aforementioned drivers. 4. USD funding concerns and tighter global liquidity conditions.

Taken together this framework argues that the USD rally should persist into early next year. As market liquidity deteriorates into year end, however, we caution about chasing the move now. Less liquidity and a lighter news flow suggest choppy trading conditions, increasing the possibility for further position squaring.

At a minimum, we think investors should become more selective in their pursuit of a stronger USD and focus on currencies that have lagged moves seen the broader G10 complex.

We are long USDCAD and look for a move to 1.3650 and look for a test of 0.7150 in AUDUSD.

Copyright © 2016 TD Securities, eFXnews™Original Article