Synopsis:
TD notes that positioning indicators are starting to lean short USD, but broader market dislocations remain a key theme for 2025. Geoeconomic uncertainties are not fully priced in, creating inefficiencies that could resolve with near-term USD strength. However, tariff developments remain a critical driver of volatility.
Key Points:
1️⃣ Market Dislocations Drive Uncertainty 🌍
- A gap exists between geopolitical uncertainty and market volatility.
- Inflation expectations and central bank outlooks remain misaligned.
- Europe-U.S. economic divergences add to pricing inefficiencies.
2️⃣ Investors Are Complacent on Risk 🚨
- Despite rising geopolitical tensions, active risk-taking remains limited.
- This has led to underpricing of external shocks in FX markets.
3️⃣ Positioning Shifts to Short USD 💵
- USD positioning indicators suggest a growing short bias.
- This could amplify volatility if sentiment shifts unexpectedly.
4️⃣ Tariff Developments as a Key Catalyst 📈
- Further tariff announcements may disrupt markets.
- USD could see renewed strength as a result of risk repricing.
Conclusion:
TD sees market complacency creating pricing inefficiencies, with near-term USD strength likely as these dislocations resolve. While positioning is shifting short USD, tariff developments and geopolitical risks could still fuel volatility, keeping markets on edge.
