Pretty self-explanatory. US and European PMIs were stronger than expected and good news is bad news now as sticky inflation gets stickier.
This yield backup will see no relief before macro data starts pointing at recession again. The primary mechanism to take that tightening global will be DXY. BofA:
View: Bullish USD snapback ideas. The last two weeks of US data confirmed our 2023 year ahead view that the DXY turns up from the 102/100 target area. We also favored fading euro in the 1.09s as a probable medium-term turning point (Chart 4). This trend change started with the market’s reaction to US non-farm payroll data on Feb 3, 2023 and remains underway in Q1.
A string of stronger than expected US economic data has continued in February. It is supporting the USD with terminal rate expectations rising, consensus bearish views being challenged and a cup and handle base forming on the Bloomberg USD index (Exhibit 1). This pattern is seeking confirmation with a daily close above 1245 to target1275-1280. If confirmed, it would further support our bias for a snap back in the USD for the rest of Q1, a common seasonal dip in April and another bounce back in May.
In our 2023 year ahead technical views we argued it tends to take time for the DXY to top after large / sharp periods of appreciation. Besides the one-off plaza accord spike and DXY collapse back in 1985, history suggests 2-5 swings sideways can occur in a range or topping process. Swing 2 up is underway and USD has upside in Q1 (Chart 2).
AUD is headed for the knackery until DM recession data arrives.
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