Moving Average Momentum Leaning Against The USD

We noted yesterday, prior to the US CPI print, there was a modest wedge between DXY performance and the 2yr interest differential with other major economies. The first chart below updates the picture, which shows the divergence has widened a touch. The USD is modestly firmer through today's session, with the DXY up around 0.15%, but this has not been enough to shift the wedge.

Fig 1: DXY & Yield Differential Wedge Persisting

Source: MNI/Market News/Bloomberg

• The hawkish Fed rhetoric from regional Fed presidents post the CPI print helped stabilize yield sentiment.
• Correlations between daily DXY shifts and yield momentum changes aren't that high. Other factors can clearly influence FX market trends over such timeframes. However, longer window rates of change (like a few weeks or a month) have higher correlations and are more stable.
• Hence if we see yield momentum to continue to move in favour of the USD, we might expect the DXY to play catch up at some stage if 2022 trends hold.
• Interestingly though, momentum in FX markets suggests risks are skewed the other way. The second chart below plots the DXY, which is inverted on the chart, against a moving average MA diffusion index for the G10 currencies.

Fig 2: Moving Average Momentum Leaning Against the USD

Source: MNI/Market News/Bloomberg

• This metric is simply calculated by measuring the proportion of the major currencies (EUR, JPY, GBP, AUD, NZD, CAD, CHF, NOK & SEK) that are either above or below key MAs against the USD - we utilize 4, the 20, 50, 100 and 200 day.
• Currently, the major currencies are firmer than the USD in 21 out of 36 possible MAs. This proportion, at just over 58%, is around YTD highs for the metric.
• All the majors are above their respective 20 day MAs against the USD, 8 are above the 50 day, with only the EUR not exceeding this benchmark. 3 are above the 100 day ( CAD, CHF and NOK). CHF is the only major currency threatening its 200 day MA to the strong side.