USD: Extending the pause – HSBC

The USD feels like a currency slipping into a “waiting game” in terms of the domestic drivers to its fortunes, according to the research team at HSBC.

Key Quotes

“The Fed appears likely to wait until December before deciding whether another rate hike is appropriate. There seems little prospect of imminent development on the fiscal front, while it may also be too early for the USD to take account of the looming debate on the US budget and debt ceiling. So while we believe the USD (as measured by the DXY index) is likely to strengthen modestly in the coming weeks, this is largely just a mirror of our expectations for weakness in the likes of EUR and GBP, for example. It also reflects our view that the USD selloff has already moved quite far, quite fast and that a pause is warranted.”

“With no fresh catalysts from the policy side, the USD looks more likely to see some paring back of positions or profit-taking by the more fortunate. IMM data suggests the market is short the USD to an extent not seen since Q1 13, which sounds dramatic but in fact the scale is not particularly stretched. The pause in the USD sell-off seen during August suggests some of the momentum chasers may have already cut their positions. In sum, positioning squaring from here would be consistent with modest USD weakness rather than a marked squeeze.”

“In addition, our expectation for an extension of the August pause in the USD sell-off is because other currencies may face a more challenging time in the coming weeks, notably the EUR and GBP. We are also bearish the AUD and NZD. We expect the DXY index to rally modestly through the 50-day MA of 95.25.”