(Opinions expressed here are those of a columnist writer for Businesshala)
ORLANDO, Fla., Oct. 11 (Businesshala) – The dollar is at a crossroads after rallying 5% in four months, as many investors assess how much the Fed’s bond purchases will fall and the price of future rate hikes. and if any further US yield increases would be for “good” or “bad” reasons.
Although not hedge funds, which continue to prop up the dollar.
If central banks’ post-2008 interest rate policy can generally be summed up as ‘long low’, speculators on the dollar now appear to be ‘long’.
The latest positioning data from US futures markets showed hedge funds and other speculators significantly increased their net long dollar positions against a range of global currencies in the week to October 5 for the 12th consecutive week.
Total net long positions now stand at $22.5 billion, the largest since June 2019, while the $7.2 billion increase from last week was the third largest in more than three years.
The dollar’s bullish couldn’t be more broad-based.
The fund flipped into a net short euro position for the first time since March last year, became net short sterling for the first time in a month, threw in the towel on its long Brazilian real position, and now holds its biggest net short Mexican peso bet. in four and a half years
Clearly, the rise in US bond yields – in nominal, real and relative terms – is all that the speculative FX trading community needs to see.
Hedge fund industry data provider HFR said its benchmark currency index rose 1% in September. It may not be anywhere near the commodity index’s astonishing 5.2% jump, but it was its best month since March last year.
Last week, the 10-year US yield rose 15 basis points, the highest since February, and is now above 1.60% for the first time since June. The dollar has risen against a basket of currencies for five weeks, and is hovering near one-year highs.
Now the question is whether the factors driving US bond yields are supporting further appreciation of the dollar or not?
The recent increase in Treasury yields has been driven by supply chain shocks, shortages, and rising inflationary pressures caused by sky-high energy prices. The break-even inflation rate has moved higher across the curve and is now nearing a year-end peak in May.
All this as the medium-term US growth outlook, as evidenced by the latest non-farm payroll gloom, has dimmed.
In short, a kind of ‘stagflation’ scenario.
Goldman Sachs analyst Zack Pandal and his team argue that this is generally a constructive environment for the dollar, whose performance “depends on whether higher inflation reflects better growth or other factors, such as unfavorable supply.” tremors.”
But when inflation expectations rise for more benign reasons, such as better growth prospects, the dollar depreciates against most currencies. That’s what they expect in the coming months as COVID-19 cases fall and economies open up, leaving a “slightly weaker” dollar going into the end of the year.
For many traders who insist on taking profits only at the peak of this dollar wave, further upside from here is likely to be limited, at least in the short term.
But Derek Halpany and his team at MUFG argue that the fund’s $22.5 billion net long dollar position is “not yet excessive” compared to what it was pre-pandemic. They have a point. In May 2019, CFTC speculators had a net dollar holding of $35 billion.
He also argues that Friday’s sub-par September employment report will not derail the Fed from its tapering schedule, which should be outlined next month. He believes that both the momentum and fundamentals point towards a stronger dollar towards the end of the year.