Credit Agricole (OTC:) highlighted an unusual divergence in the financial markets on Wednesday. Despite US 2-year rates and 10-year yields hitting their highest levels since 2006/2007, the US dollar (USD) remains sluggish. This discrepancy is driven by rising global rates, particularly in Australia, and a strategic pullback from overextended USD long positions in the forex market.
The bank’s short-term fair value models, which take into account relative rate differentials and other key foreign exchange drivers, suggest that the USD is undervalued against major currencies such as the Euro (EUR), British Pound (GBP), Canadian Dollar (CAD), and Japanese Yen (JPY).
While Credit Agricole expects this decoupling to persist in the short term due to global rate hikes and profit-taking in the forex market, it emphasizes the growing undervaluation of the USD as a strong indicator for a potential rebound. The bank’s observation underscores the complex dynamics at play in the international currency markets where multiple factors can influence currency valuations concurrently.
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