Synopsis:

TD Securities sees a bullish trajectory for the USD in early 2025, driven by geopolitical and political economy (geomacro) dynamics. However, stretched USD positioning suggests a near-term pause. Into year-end, they favor long JPY positions against select G10 currencies.

Key Points:

• Geomacro Dynamics:

  • Political economy and geopolitics are becoming primary market drivers, surpassing central bank influence as they also react to these changes.
  • Technology disruptions exacerbate wealth inequality, voter dissatisfaction, and political instability, contributing to market volatility.
  • Supply chain disruptions from the pandemic and geopolitics continue to distort inflation metrics, creating uncertainty.

• USD Outlook:

  • Bullish USD expectations in early 2025, supported by geomacro themes.
  • Near-term, USD positioning and valuations appear overstretched, suggesting a pause before resuming an upward trend.

• Tactical FX Trade:

  • Preference for cross-G10 trades into year-end.
  • Favoring long JPY positions against EUR, GBP, CAD, and CHF, reflecting its relative undervaluation and safe-haven appeal.

Conclusion:

While TD expects USD strength to persist into 2025, near-term dynamics may prompt a temporary pause. For year-end tactical plays, they recommend focusing on G10 cross trades, particularly long JPY against EUR, GBP, CAD, and CHF, leveraging geopolitical uncertainty and stretched USD positioning.