BofA On DXY Depreciation & Concentration Risk: Good & Bad News For USD Bears

Bank of America note that “the DXY sell-off in November was nicely in line with its estimated move based on key drivers.”

• “This is encouraging news for USD bears as it is in contrast to July, and to a lesser extent January ‘23, when the depreciation was "excessive" and eventually retraced.”
• “However, USD weakness has been driven predominantly by the equity rally (better risk sentiment), with narrower US rate differentials, lower energy prices and China optimism contributing only marginally.”
• “With BofA's Bull-Bear indicator turning neutral, the burden of driving a weaker USD shifts to non-equity factors.”
• “As USD bears for 2024, we take a "glass half full" view - there is plenty of room for US recoupling and China recovery (our base case) to reinforce the USD downtrend. But the market may hold off for stronger evidence of this in the data.”