Funds have made the biggest bet in six months that the dollar will strengthen against major world currencies, and you can see why.
Rising interest rate spreads and yields, favorable relative growth prospects and safe haven flows amid explosions in stock and cryptocurrency volatility – many factors explain the dollar’s rise to a 20-year high.
Recent data from the Commodity Futures Trading Commission show that the funds increased their net long position in dollars against G10 currencies to $ 20.6 billion in the week of May 10 from $ 19.8 billion in the previous week.
This is the largest net long position since the beginning of December last year. The growing trend has a broad basis – the dollar is long against all major currencies except the euro, and the short position is very small by historical standards.
A long position in an asset or security is in fact a bet that its value will increase, and a short position – on the contrary.
Chart: CFTC dollar positions and dollar index
Graph: net CFTC dollar position and dollar index
The dollar index, which measures the value of the dollar against a basket of major currencies, rose above 104.00 on May 9 for the first time since December 2002, supported by a 50 percent increase in the Federal Reserve rate and Fed Chairman Jerome Powell. promise that changes of 50 basis points are approaching.
6 BILLION DOLLARS OF PARIS AGAINST THE Pound Sterling
According to Goldman Sachs analysts, the dollar is overvalued by 18%, but they are cautiously calling for a correction, while Barclays analysts note that the dollar looks stretched, but still raised their forecast.
“Hole for longer,” Barclays wrote Monday.
There is debate about the extent of the Fed’s final tightening – the final rate, which provides for the pricing of secured overnight funding (SOFR), fell to 3% from almost 3.50% on May 4, the day of the Fed’s political decision, but most observers believe it is still one will be much more aggressive than its counterparts.
For example, the Bank of England also raised rates again this month, but warned of the risks of recession and the possibility of double-digit inflation. This is not what the pound wanted to hear, and its slip has accelerated sharply.
CFTC funds have been in short supply since mid-November, except for the week before Russia’s invasion of Ukraine in February. Since then, they have been shorting weekly – now at more than $ 6 billion – and on Friday the pound reached a two-year low of $ 1.2155.
Chart: CFTC British Pound positions
The European Central Bank is directing markets to a likely rate hike in July, but the hawk noise is completely drowned out by the alarming recession. The decline in the euro against parity with the dollar is beginning to worry ECB officials.
Over the past week, CFTC funds have risen again in euros, changing position by almost $ 3 billion a week. But these long positions will be crushed by the fall of the currency to $ 1.0350.
Derek Halpenny of MUFG believes that the minimum euro in 2017 ($ 1.0340) is the last line of defense before $ 1.00. USA and for the first time since 2002. If hedge funds think the same thing, they could quickly move to a clean short position in euros. .
Touching Ingredients of the 1985 Plaza Exchange Restriction Agreement (Reuters, May 11)
The pound falls sharply as the Bank of England forecasts 10% inflation and recession (Reuters, May 6)
Fed crosses fingers over capitulation in 1994 as path to growth narrows (Reuters, May 5)
Violation of central bank consensus heightens tensions in dollars and markets (Reuters, May 4)
(Here are the views of the author, a Reuters columnist)