FX: Tactical and cyclical bullish indicators aligning for a US dollar rebound

Recent tactical signals confirm that a short-term US dollar rebound is underway.

Our aggregate net active signals recently spiked to levels that have marked lows for the dollar over the past few years. On top of this, breadth against G10 currencies has been steadily improving, short positioning remains stretched, and Sep-Nov tend to be seasonally strong months for the dollar.

On a cyclical basis, our fundamentals-based FX edge model shows most G10 currencies have negative scores vs the USD. As repatriation flows have lessened, the only major cyclical tailwind is the balance of growth is shifting from the US to the rest of world. But even this might be passing as the Q3 US growth scare fades.

Our preferred expressions for a tactical dollar bounce are short AUDUSD and short EURUSD. The RBA is shifting to further rate cuts amid falling inflation in Australia, and AUD has a negative score in our FX Edge model. While the EUR has a positive Edge score vs the USD, positioning and VP Fast Money are both stretched and weak competitiveness is a structural headwind for the EUR.