Column: Hedge fund dollar policy: Longer for longer: McGeever

A US five dollar bill can be seen in this illustrative photo from June 1, 2017. REUTERS / Thomas White / Illustration / File Photo

ORLANDO, Fla., Oct.11 (Reuters) – The dollar is at a crossroads after a 5% rally in four months, as many investors assess how much the Fed’s bond purchases and futures are Rate hikes are factored in, and if any further rise in US yields will be for “good” or “bad” reasons.

Not the hedge funds, however, which continue to suck dollars.

If the interest rate policy of central banks after 2008 could generally be reduced to “lower for longer”, the position of speculators on the dollar now appears to be “longer for longer”.

Latest U.S. futures market positioning data shows hedge funds and other speculators significantly increased their net long dollar position against a range of global currencies in the week through October 5 for the 12th week in a row .

Total net long position now stands at $ 22.5 billion, the highest since June 2019, while the increase of $ 7.2 billion from the previous week was the third in more than three years .

CFTC

The dollar’s uptrend couldn’t be more generalized.

Funds went net short in euros for the first time since March of last year, went net short on sterling for the first time in a month, threw in the towel on their long position in Brazilian real and now hold their biggest net short bet in Mexican peso in four and a half years

Clearly, rising US bond yields – in nominal, real and relative terms – is all the forex speculative community needs to see.

Hedge fund industry data provider HFR said its benchmark currency index rose 1% in September. It might not be near the astonishing 5.2% rise in the commodities index, but it is its best month since March of last year.

Last week, the US 10-year rate rose 15 basis points, the highest since February, and now sits above 1.60% for the first time since June. The dollar has appreciated against a basket of currencies for five weeks and is near a year high.

The question now is whether or not the factors behind the rise in US bond yields are supporting a further appreciation of the dollar?

The recent increase in Treasury yields was sparked by mounting inflationary pressures fueled by supply chain shocks, shortages and extremely high energy prices. Break-even inflation rates have risen across the curve and are now on the verge of reaching the year-highs reached in May.

All of this as the medium-term growth outlook in the United States, as evidenced by the latest disappointment in the non-farm payroll, has darkened.

In short, a sort of “stagflation” scenario.

Goldman Sachs analyst Zach Pandl and his team argue that this is generally a constructive environment for the dollar, whose performance “tends to differ depending on whether higher inflation reflects better growth or other factors, such as adverse supply shocks “.

But when inflation expectations rise for more benign reasons such as better growth prospects, the dollar tends to depreciate against most currencies. This is what they expect in the coming months as cases of COVID-19 decline and economies open, leading to a “moderately weaker” dollar by the end of the year.

The urge for many traders who have been on top of this wave of dollars to simply take profit is also likely to limit the potential for much more upside from here, at least in the short term.

But Derek Halpenny and his team at MUFG argue that the $ 22.5 billion fund’s net long dollar position is “not yet excessive” compared to what was in place before the pandemic. They’re right. As of May 2019, the net dollar holdings of CFTC speculators stood at $ 35 billion.

They also argue that Friday’s September jobs report won’t derail the Fed from its cutback schedule, which is expected to be presented next month. Dynamics and fundamentals both point to a stronger dollar by the end of the year, they say.

Editing by Jacqueline Wong

Our standards: Thomson Reuters Trust Principles.

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