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The USD has begun the new year on a slightly better footing. This comes as US yields have ground higher. Economists at TD Securities expects the backup in yields to continue as the composition temporarily shifts to real rates in the short-term. Additional supply pressure and casual talk about higher yields among some Fed officials threatens a very well populated short USD trade in the coming weeks. But longer-term, the outlook should remain bearish for the USD as real rates should be contained relative to major peers.

Key quotes

“We see signs that suggest some tactical relief for a badly bruised greenback while remaining medium-term USD bears. Indeed, we think currency markets are at a crossroads, revealing some kinks of the reflationary theme that has fueled aggressive USD shorts. The impact could leave USD bears wrongfooted on a 2-3% move higher.”

“One key ingredient to upend the USD weaker move would be a seismic shift in the real yield backdrop such that it regained international supremacy. Until then, the sustainability of a USD up move is questionable and likely to be viewed as a countertrend or corrective move, rather than the beginning of a bullish USD outlook.”

“We expect the reflation trade to re-establish with greater vigor later this year. As much as we anticipate additional fiscal stimulus to drive a higher inflation risk premium, we would also expect much greater progress on a vaccine rollout. This, we think, has reflation elements to it. Provided that covid is contained under a Biden administration, that could help confidence and further fuel a rebound in global growth expectations and risky asset prices.”