Is the US Dollar Rally Starting to Run Out of Steam?

TD Securities are self-confessed USD bulls, and have been for quite some time, so this warning of a potential period of decline/consolidation is notable.

Could the pound sterling take advantage of this softness and restart its climb?

Where is the US dollar now?

At the time of writing the following rates are seen in global FX:

The pound to dollar exchange rate @1.6266, 0.15 pct higher.
The euro to dollar exchange rate @ 1.2684, 0.01 pct higher.
The US dollar to Canadian dollar @ 1.1151, 0.13 pct lower. 
The Australian to US dollar exchange rate @ 0.8746, 0.32 pct higher.

Beware: This is a spot market quote, your bank will affix a spread at their own discretion. However, an independent FX provider will seek to undercut your bank's offer, thereby delivering up to 5% more FX. Please learn more here.

TD Securities Express Doubt on US Rally Extension

So, should we be buying the likes of the pound to take advantage of a potential USD decline?

Martin Schwerdtfeger at TD Securities lays the case for a potential USD fall:

"We have been doubtful of late regarding the potential for the current USD rally to extend much longer without, at least, a temporary pause before resuming the uptrend.

"The big dollar is wellpositioned to close its 11th winning week tomorrow, a very rare occurrence. It might seem blasé to note that markets do not move in a straight line forever, but there are more arguments to question the USD's resilience than just the stylized fact that winning streaks, even long ones, usually do not extend past eight weeks.

"To keep fueling the current USD rally, US data would have to consistently deliver according to expectations for a solid recovery, showing a few upside data surprises here and there to keep the upward momentum going."

The highlight for the dollar then will be the release of US non-farm payroll data on Friday the 3rd of October.

Analysts are predicting a reading of 203K on the headline number, this up from the previous months 142k.

The unemployment rate is predicted to remain unchanged. If any negative surprises are released then we would certainly expect to see a potential end to the USD rally.

Morgan Stanley Staying Long on USD

Before running to bet against the USD it is worth taking into account that there are those still backing the dollar.

Morgan Stanley tell us:

"Renewed positive US data surprises have fuelled the USD’s ascent further over the past week. However, yield curve dynamics will play an important role in identifying where USD strength is likely to be most emphasized going forward.

"While rising US front end yields attract capital inflows from the low yielders (EUR, JPY, CHF and SEK), we expect the driver of USD strength to change dramatically once yields further down the curve start to rise," MS argues.

"Higher US long end yields will leave the high-yielding currencies exposed, especially those with high levels of private sector debt and extensive foreign funding needs.

"For the time being, we maintain our broad USD long position, but bearish high yield positions are expected to increasingly contribute positively to our portfolio."