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Flash: Tracing the genesis of the USD rally – UBS

FXstreet.com (Barcelona) - There are many reasons behind the dollar's recent rally but amid all the emphasis on policy changes, positioning perhaps is somewhat underappreciated.

According to Research Analyst Geoffrey Yu at UBS, “Of course, valuations of any asset will change when the underlying fundamental drivers change, but the extent of the valuation adjustment will often depend on the ex-ante positioning of an individual currency or currency pair.”

Looking at structural positioning across G10 and EM, in addition to the more recent adjustments so far in 2013, is clear the euro and dollar have the most to gain if markets begin to entertain a full unwind of the post-crisis 'new normal'. Using the UBS FX Flow Monitor, we establish a rudimentary positioning barometer by dividing the cumulative flow in a particular currency over the average weekly volume of the same pair, over a specific period. In essence, the bigger the positioning in either direction, the more 'effort' markets will need to skew flow in a particular direction to reverse the exigent positioning.

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