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Elevated USD alpha unsustainable - Nomura

FXStreet (Bali) - Nomura's view on dollar beta and dollar alpha suggest that positive, albeit less extreme dollar momentum is ahead.

Key Quotes

"We have been through a period of elevated dollar alpha, defined as the dollar movement, which cannot be explained by rates moves. Arguably the recent dollar alpha is the strongest since the global financial crisis."

"The underlying reasons for the dollar alpha materializing are very different compared to 2008. Importantly, the dollar remains strongly positively correlated to risk sentiment (i.e. the dollar is viewed as a ‘risk asset’ now that the US economy is outperforming)."

"But there is some tentative evidence that the dollar alpha may be losing momentum into November. This is especially the case if we strip out USDJPY moves from the recent global dollar dynamics."

"Hence, stabilization or reversal of recent USDJPY dynamics may matter for global dollar momentum, especially given increasing contagion from USDJPY into USDKRW and USDTWD."

"The implication is that the direct link between the USD and rate differentials (dollar beta) may become more important again in coming months."

"This makes reading signals from the Fed increasingly crucial for dollar trading"

"Our medium term view on the Fed and US rates suggest that dollar beta still has potential to support the dollar"

"Together, our view on dollar beta and dollar alpha suggest that positive, albeit less extreme dollar momentum is ahead. To maintain very strong momentum, the Fed would have to turn incrementally hawkish (and/or foreign growth would need to continue to moderate)"

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