Liquid Insight: Fading the USD Vibe-cession

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Liquid Insight: Fading the USD Vibe-cession

Where is the soft USD sentiment most glaring?

The USD’s lack of upward momentum this year stands in notable contrast to relative

economic fundamentals. By most measures (retail, labor, GDP, services inflation,

corporate earnings), the US economy has proven to be quite resilient this year. This has

served to push back on the prevailing year-ahead narrative that labor weakness would

drive activity lower and usher in Fed rate cuts.

This can be cleanly observed in economic data surprises, both absolute and in relative

terms. Exhibit 2 shows the A DXY-weighted measure of the US-global surprise index

differential, which has recently widened to levels last observed in 2023. On a bi-lateral

basis, upside US surprises (and directional trends) currently stand above all other G10

economies, using 2-year Z-scores. (Exhibit 1)

Yet the USD’s reaction has been quite anemic in this context. This suggests either the

market suspects this is a temporary phenomenon, or that it will not translate into tighter

monetary policy. We suspect it is more the latter than the former, though pressure could

be mounting should these trends continue. A prolonged closure of the Strait of Hormuz

should only serve to exacerbate this deviation, given the US’s relative insulation to oil

shocks.

Exhibit 1: Upside US data surprises have stood out recently Exhibit 2: DXY has underperformed recent US economic

amongst the G10 outperformance

G10 Economic Surprise measures: level and weekly change (Z-scores*) US-foreign Economic Surprise Indices (DXY weighted)

4 150 114 3 level (Z)

2 100

Weekly Change (Z) 109

-1 0

-2 99

-3 -50

-4 -100 ESI Diff (DXY weighted) 94

-5 DXY

-6 -150 89

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