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After the rally comes the tears – TD Securities

Analysts at TD Securities consider the present market performance as a technical washout while supporting a long call on USD/CAD and favoring the NZD/JPY sell this week.

Key quotes

The market takes a step back from the reflation narrative, reflecting a mix of stretched positioning, excessive momentum, and frothy valuations. We think this backdrop is a reset of excess rather than a rejection of it.

The global growth data hasn't turned fast enough to justify the optimism priced in across markets. January PMIs showed more stability, but a noticeable lift-off remains absent.

The outbreak of the coronavirus has turned into the catalyst for the correction in risk assets.

We note that our simple tracking model that shows MSCI World versus the global PMIs implies a +20% gap. Furthermore, our positioning tracking for the broad USD shows shorts sitting in the 90th percentile of the past year's range.

Coupled with rich valuations, the USD has some room to rally in the very short-run.

We don't think this is a fundamental shift but more of a technical washout.

Markets have grown impatient with the slow turn of the reflation trade. 

This week a neutral Fed may also reinforce the short-squeeze across currencies, strengthening the USD.

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