- The US Dollar Index has rallied close to 3% since late March, helped by a lift in US bond yields.
- ANZ Bank thinks the DXY rally could last for some time yet given historic, technical and seasonal factors.
- It says that makes the Australian dollar :susceptible to further downside pressure”.
After falling steadily for well over a year, the US dollar has found some rare support in recent weeks.
The US Dollar Index, or DXY, has rallied by close to 3% since late March, helped by a lift in short and long-dated US bond yields to fresh multi-year highs, stretched short positioning among traders, technical-related buying and renewed concerns over the outlook for global economic growth.
The question now is whether the rally in the greenback will continue, or reverse, in the period ahead?
ANZ Bank thinks it will be the former, at least in the near-term, given prior periods when the US dollar and bond yields move in the same direction.
“With US bond yields pushing higher again and the 10-year yield moving past the psychologically significant 3% level, this has lent support to the USD,” it says, adding that the dollar “does not always correlate highly with US yields”.
“But during periods when the correlation between the two is high and rising, it tends to last for an average of around two months.
“Hence, should US bond yields continue to move higher, history suggests that the USD could be supported for some time.”
And with so many investors betting against the greenback, ANZ says stretched short positioning, technical-related buying and seasonal strength in May could see the US dollar rally extend even further.
“Leveraged funds’ USD short positioning is near a record high, and short USD positioning by asset managers is also at all-time highs,” it says.
“With the DXY breaking above key near-term technical resistance levels and, importantly, breaking above the downtrend channel in place since early 2017, the unwinding of short dollar positioning could propel a larger rebound in the DXY.
“The unwinding of short dollar positioning can sustain USD strength for a time and could be pronounced given that we are also entering a month where the dollar has historically tended to do well.”
This chart from ANZ shows the DXY has recently broken out of the downtrend it’s been in since the start of 2017.
Should the DXY continue to push higher in the months ahead as ANZ suggests, it says cyclical and commodity currencies, in particular, are likely to come under the most significant selling pressure.
“In this regard, AUD looks susceptible to further downside pressure,” it says.
“The lack of carry means the AUD remains at the mercy of shifts in risk appetite and, more recently, of USD rate dynamics.
“Both suggest AUD weakness ahead.”
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