Credit Agricole: Despite rising US rates, the USD underperforms – what's next?

<p>Synopsis: Credit Agricole highlights an intriguing divergence between the recent rally in US rates and yields and the simultaneous underperformance of the USD. Despite US 2-year rates reaching their highest since 2006 and 10-year yields nearing their 2007 peak, the USD hasn't mirrored this strength. Several factors contribute to this phenomenon, including rising rates outside the US and substantial profit-taking from extended USD long positions.</p><p>Key Insights:</p><ol><li><p>Disconnect Between Rates and USD: US rates and yields have witnessed a significant rally, with 2-year rates hitting a pinnacle since 2006 and 10-year yields approaching their highest since 2007. Yet, the USD hasn’t rallied in response, indicating a disconnect.</p></li><li><p>Global Rate Dynamics: Rates and yields are also climbing in other countries (e.g., Australia), potentially diluting the USD's appeal in real terms, despite its gains against certain currencies.</p></li><li><p>Positioning and Profit-Taking: The USD, currently the most substantial FX market long, appears to be experiencing profit-taking, contributing to its underperformance. This trend suggests a strategic pullback from overextended long positions.</p></li><li><p>USD’s Relative Undervaluation: Short-term fair value models indicate the USD is undervalued against the EUR, GBP, CAD, and JPY. These models consider various fundamental FX drivers, including relative rate differentials.</p></li></ol><p>Conclusion: Credit Agricole identifies a noteworthy decoupling between rising US rates and the USD's unexpected underperformance. The analysis suggests that this trend may continue in the short term, driven by global rate increases and profit-taking in the FX market. However, the growing undervaluation of the USD, particularly against major currencies, presents a compelling case for its potential rebound, especially if the current market dynamics persist.</p><p>For bank trade ideas, <a href="https://plus.efxdata.com/ad/track/4655172E54F06040571CD0AB083845AD" rel="nofollow" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://plus.efxdata.com/ad/track/4655172E54F06040571CD0AB083845AD&amp;source=gmail&amp;ust=1697740844209000&amp;usg=AOvVaw0pImy77qXOGk-CpKU6jmN4">check out eFX Plus</a>. For a limited time, get a 7 day free trial, basic for $79 per month and premium at $109 per month. <a href="https://plus.efxdata.com/ad/track/4655172E54F06040571CD0AB083845AD" rel="nofollow" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://plus.efxdata.com/ad/track/4655172E54F06040571CD0AB083845AD&amp;source=gmail&amp;ust=1697740844209000&amp;usg=AOvVaw0pImy77qXOGk-CpKU6jmN4">Get it here</a>.
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This article was written by Adam Button at www.forexlive.com.