Did You Know? USD having its best month since 1967 - is the move too overloved?

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Unless we see a USD collapse in the session ahead this would be the best monthly gain since 1967!

Considering as the seasonals are so negative for the USD in April (over the past 20 years GBPUSD has closed higher 85% of the time, AUDUSD 70%), the fact the USD has been so dominant is even more impressive where 18 of the past 20 trading sessions has seen the USD close higher - so undoubtedly trading a momentum strategy has been generated solid returns.

Systematic trend followers are max long of USDs, which has added weight to the one-way USD flow, and we can see trend-following fund returns (from CTA/Commodity Trading Advisors funds) booking very healthy returns in April – following, and not fighting the tape has been the strategy in April and through most of 2022.

It's not just central divergence that has kept the USD bid, notably with the BoJ maintaining an uber dovish line and the PBoC allowing the yuan to depreciate. But we‘ve seen a grab for USDs by EM banks, and I’d argue that the USD has been the instrument of choice to hedge portfolios, as clear gold and US Treasuries have not played defence at all.

In April weve seen:

• USDJPY -7%

• NZDUSD -6.6%

• GBPUSD -5.2%

• EURUSD and AUDUSD both -5.1%

The wash-up is clients are now as short of USDs as Ive seen for a while – it's not hard to see why. The USD index is trading into multi-year resistance – the various oscillators are at extremes on any timeframe. We see the price trading 4.7% above its 50-day MA, which is a 3-standard deviation from the long-term average. Options skew is severely favoured to call volatility (over puts). We can go on, but the USD is absolutely loved.

We also need to realise this time is different and that has made fading the USD incredibly tough – we are going through a regime shift in markets and what is technically overbought has stayed overbought for a sustained period – unless the news flow radically shifts, the predominate reason funds sell USDs is for a position adjustment and that could be shallow.

Still, as we head past the last day of the month, we ask whether the USD juggernaut keeps driving higher or finally succumb to profit-taking and a position adjustment. It might not take much – if a fire breaks out in the disco you want to be closest to the exit – as they say.