One misunderstood element of the Q1 USD sell-off was the idea that this was driven by overseas investors increasing hedge ratios on their USD assets.

In fact, our investor sentiment data showed that foreign investor hedge ratios on US assets have barely moved. Why foreign investor not increase hedges on their USD exposure? Simply because it is expensive to do so and USD foreign hedge ratios show a strong relationship with relative rates.

This may spell further bad news for the USD. As the Fed is set to accelerate its easing cycle while others are at, or close to, an end to rate cuts, the cost to hedge USD exposure will decline, leading to another leg of USD selling.