TD Securities says the US economy and labour market remain resilient without overheating, which has led it to push back its Federal Reserve rate-hike calls to December 2026 and March 2027. It adds that market pricing for Fed hawkishness has likely peaked, and argues the Fed is unlikely to deliver hikes beyond what is already priced, limiting scope for persistently bullish USD signals from the data-and-policy channel alone.
The firm expects the Fed to move at a quarterly pace, and says recent US data imply rates cannot be raised more quickly than once per quarter to give the dollar an extra lift via tighter monetary policy. Even so, its scorecard ranks the USD highest, citing favourable rate differentials, resilient growth and strong equity performance, while MRSI’s long-dollar positioning has remained profitable and broader market positioning is now long dollars too. It also flags that short positions in low-yielding G10 currencies—particularly SEK, CAD and NZD—look crowded.
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Cautious Outlook for the US Dollar
We suggest derivative traders approach the US Dollar with caution in the coming weeks, as the currency’s upward momentum is likely reaching its limit. Although the US economy remains remarkably resilient, with GDP growing at a steady annualized rate of 2.5% and unemployment holding stable at 4.1%, the labor market is no longer overheating. This steady but non-inflationary growth suggests the Federal Reserve will avoid aggressive tightening, keeping the Dollar in a tight trading range.
We expect the central bank to hold off on rate hikes until December 2026 and March 2027, meaning the peak of hawkish market pricing has already passed. With the two-year US Treasury yield hovering near 4.0%, further yield-driven rallies for the greenback will be difficult to sustain. Derivative traders should look to exploit this capped upside by writing call options on the US Dollar Index (DXY) near major resistance levels.
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Opportunities in Crowded G10 Currency Shorts
While the Dollar still holds the highest score on our internal metrics due to favorable growth differentials, short positions against low-yielding G10 currencies have become incredibly crowded. For instance, recent exchange data shows net-short positions on the Canadian Dollar and New Zealand Dollar are hovering near multi-month highs, leaving them highly vulnerable to sudden short squeezes. We recommend taking tactical long positions on these undervalued currencies through derivative contracts to capture potential reversals.
Instead of chasing the USD rally, we advise utilizing range-bound strategies on major dollar pairs to profit from the expected consolidation. Historically, when the Fed shifts to a quarterly or slower adjustment pace, currency volatility tends to compress significantly. Position sizing should remain conservative as we transition into the final quarter of the year, focusing on relative value plays rather than broad dollar strength.
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