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Analysts at Westpac explained that their model continues to gently walk back its long USD exposure, trimming it back to 28% this week, driven mainly by slower growth in US yield support in recent sessions.

Key Quotes:

“The USD arguably does not have much long-term upside potential. As the slide over shows it is the most overvalued in the G10 on a purchasing power parity basis (one of nine signals in our model), though at +16% its overvaluation is not extreme. At the other end of the spectrum, JPY and the European currencies (ex-CHF) are all broadly undervalued, as a group by more than 20%.

The USD’s “overvaluation” is of course traceable to the relatively more advanced stage of the US business cycle compared with the rest of the world. As slide one shows the USD may be the most overvalued currency but it is also the only one that boasts both a positive growth signal and a positive yield signal.  

Both Canada and the Eurozone enjoy positive growth signals too, but suffer from negative yield signals, while AUD and NZD have a relatively decent total yield signal, but negative growth signals. NZD’s growth signal is notably weak.  

Our growth signal is based on the OECD’s leading index, unemployment, retail sales, property values and business and consumer confidence. Soft Q1 retails sales and lackluster business and consumer confidence have produced a notably negative NZD growth signal vis-à-vis the G10.”