Bank of America: USD In Retrospect

Bank of America note that “last year, we used a simple out-of-sample regression exercise as a sanity check for whether USD moves were consistent with its external drivers (equities, Fed policy, China, energy prices). This initially suggested USD depreciation since November 2022 may have overshot, but the persistence and magnitude of the divergence implies more durable factors at play. We update our framework to account for two developments: changing sensitivities upon including 2022 in the sample and movements in non-U.S. rates. For 2023 year-to-date, external drivers imply a small depreciation in the DXY (-1.3%) with the rise in U.S. rate differentials more than offset by improvement in China sentiment, global equity resilience, and lower energy prices. That said, we are constructive USD near-term on the possibility of some reversal in risk sentiment, supported by the rising beta to global equities within our framework.”