Analysts at Nordea Markets suggest that we are though reluctant to call a “top” in the USD yet, as USD excess liquidity is still shrinking at a faster and faster pace.
Key Quotes
“Developments in the excess USD liquidity in the commercial banking system has probably been the best variable to explain the broader USD trends since 2016.”
“Judging solely from the USD excess liquidity developments, the broad USD will peak in either November or December (with mid-November the most likely timing). The trend reversal will be even more substantial in a debt ceiling stand-off, when the US Treasury is forced into flushing the commercial banking system with USDs, as the Treasury cash balance at the Fed is emptied (as issuance is a no-go).”
“On top of a pending trend reversal in the USD excess liquidity developments, we also see early signs of a trend reversal in the spread between US core inflation and inflation in the rest of the G10 space.The US-G10 inflation spread has narrowed for two months in a row (pending confirmation from e.g. UK and Japan this week) and if Euro area core inflation jumps to 1.3% in October on basis effects, then the US-G10 core inflation spread will have narrowed 0.4 pct.-points since the peak all else equal. A non-neglectable trend reversal for the pricing of the USD.”
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