Synopsis:

TD questions whether the recent USD decline signals the end of "USD exceptionalism" but remains skeptical. While the market narrative has shifted, positioning has reached an extreme short bias, and the USD still holds key macro advantages. TD expects a USD rebound in Q2, which they see as the likely peak.

Key Points:

1️⃣ USD Selloff Gains Momentum, But May Be Overdone 💵

• The dollar has weakened broadly, with EUR nearing 1.08.
• EM carry trades have outperformed on a risk-adjusted basis.

2️⃣ Extreme Positioning Suggests a USD Bounce 📊

• The market has swung from max long to nearly max short on the USD in recent months.
• EUR positioning has surged 2.5 standard deviations, indicating a possible overshoot.

3️⃣ Markets Misreading the Macro Story 🏦

• US data surprises are softening, but growth expectations remain firm.
• Inflation risks are more pressing than growth concerns for now.

4️⃣ Tariff Uncertainty & Sentiment Risks 🌍

• Markets are complacent about tariff risks and geopolitical uncertainty.
• A shift in tariff rhetoric could improve US sentiment and support relative equity performance.

Conclusion:

TD does not see this as the end of USD strength, expecting a rebound in Q2 as extreme positioning unwinds. While the market narrative has changed, the dollar retains key macro advantages, and inflation risks remain underpriced.