Synopsis:

TD Securities anticipates fluctuating risks for the USD in the short term due to conflicting economic drivers but sees a trend toward a stronger USD through early 2025. The forecast is based on a blend of growth and policy dynamics, with inflation divergence playing a significant role.

Key Points:

• Renewed FX Market Interest: Recent developments have reignited investor interest in the forex market as a platform for expressing macroeconomic and geopolitical views. However, the presence of conflicting drivers increases the complexity of market analysis.

• Upgraded USD Outlook: TD has revised its outlook on the USD, expecting further gains into early 2025. This revised forecast is informed by a combination of growth and policy shocks. In particular, inflationary pressures and the divergence in interest rates are pivotal factors.

• Inflation and Rate Divergence: The divergence in inflation rates, particularly between the US and other regions, is becoming a dominant force. Although global growth rates are converging, which generally counters USD strength, the U.S.'s pronounced inflation dynamics are starting to have a more substantial impact.

• Volatility and Market Sensitivity: The current low volatility in FX markets is viewed as unsustainable, particularly given the backdrop of geopolitical uncertainty and inconsistent inflation data. These conditions are tightening financial conditions, and markets are likely to become more reactive.

• Central Bank Dilemmas: The divergence in inflation rates poses a significant challenge, compelling central banks to make tough choices between supporting growth and controlling inflation. This situation could lead to increased market disruptions and affect currency valuations, particularly the USD.

Conclusion:

TD Securities' analysis suggests a complex and volatile period ahead for the USD, with potential for both short-term risks and medium-term gains.