Dollar Rally Seen Stretched by Month-End Rebalancing Flows

TD Securities' TD Macro Research Insight has declared that the US Dollar's rally is likely to be stretched into year-end, with little chance of reaching new highs in the current Federal Reserve hiking cycle. The research team highlights several factors contributing to this bearish view on the Dollar, including month-end equity rebalancing flows and weaker-than-consensus US payrolls.

TD Securities notes that comparing FX-adjusted global equity index returns, their month-end rebalancing framework shows a 1.0-1.5 z-score rebalancing flow out of the USD and into EUR, GBP, and CAD. This suggests investors are shifting assets away from the Dollar.

The research team also points to a trend-following framework indicating that the USD rally has become stretched against several major currencies, including EUR, GBP, CAD, SEK, and MXN. Unless the Federal Reserve significantly out-hawks global central banks or regional growth outlook starts to falter ahead of the US, TD Securities does not foresee the Dollar breaking out to a new high.