Column-Hedge funds bullish dollar view distorted by yen outlier: McGeever

div classBodysc17zpet90 cdBBJodivpBy Jamie McGeeverp

pORLANDO, Fla. Reuters – Hedge funds remain bullish on the dollar, holding a net long dollar position in currency futures markets for more than nine months. But remove the Japanese yen from the equation, and the picture is much more blurred.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pU.S. futures market data show that speculators trimmed the value of their overall long dollar position against a range of currencies for a second week, but increased their net short yen position to the largest in three and a half years. p

pIndeed, there are only a handful of periods since Commodity Futures Trading Commission CFTC yen futures contracts were launched in 1986 where funds have been more bearish on the Japanese currency than they are right now.p

pThe latest CFTC data for the week ending April 12 show that funds increased their net short yen position to 111,827 contracts from the previous weeks 103,829. p

pThat is the biggest since October, 2018. As the following chart shows, it is approaching historic levels.p

pCFTC Funds Yen Position https:fingfx.thomsonreuters.comgfxmktegvbkenobpqCFTCYEN2.jpgp

pDollarYen Vs CFTC Positions https:fingfx.thomsonreuters.comgfxmktzjvqkmqylvxCFTCYEN1.jpgp

pThe size of that bet against the yen in dollar terms is large, but not quite as extreme. It stands at 11.15 billion, the biggest since November last year and up from 10.5 billion the week before. p

pBuying dollars and selling yen has been the one FX trade that speculators have got spectacularly right this year, as the divergence between U.S. and Japanese interest rates and bond yields in the dollars favor has exploded. p

pThe Federal Reserve is in the early stages of what is shaping up to be the most aggressive inflationbusting cycle of interest rate rises since 1994. The Bank of Japan, meanwhile, is sticking with its massive stimulus program to support a fragile economic recovery.p

pUSJapan 2Year Yield Spread https:fingfx.thomsonreuters.comgfxmktmovanomqxpaUSJP2Y.pngp

pThe dollar made a fresh 20year high last week above 125.85 yen and on Monday it nudged 127.00 yen, lifting the broader dollar index to a twoyear peak. p

pJapanese policymakers have voiced disquiet about the yens decline. But it may require more than wellintentioned words to stop the rot. p

p“The prospects of a change in the yens depreciation trend will ultimately be determined by U.S.Japan monetary policy divergence and, hence, global inflation trends,” Barclays analyst Shinichiro Kadota wrote on Monday. Selling pressure on the yen should persist in the near term, he added. p

pHedge funds stance on the dollar against other currencies, however, is much more mixed. p

pThe latest CFTC data show that they trimmed their bets on a stronger dollar against a range of six major currencies, including the yen, to 13.22 billion from 14.136 billion. That reduction was mostly driven by the euro.p

pFunds increased their net long euro position by 11,690 contracts to 39,060 contracts, an aggregate bet worth 5.285 billion. That is funds most bullish euro view in five weeks.p

pCFTC Dollar, Euro Positions https:fingfx.thomsonreuters.comgfxmktgkvlgkmlnpbCFTCEUR.jpgp

pBut it isnt paying off. The euro last week fell to a oneyear low of 1.0756 after comments from European Central Bank ECB President Christine Lagarde were viewed as a sign that the ECB was in no rush to match the Fed in raising interest rates.p

pA growing number of analysts are now predicting that the euro could fall towards parity with the dollar in the months ahead. Thats not something funds are positioning for. p

pRelated columns: p

pEuro FX reserve demand returns after years of neglect Reuters, April 13 p

pJapanification still lurks behind hawkish Fed frenzy Reuters, March 29p

pThat rare crisis, when the yen falls Reuters, March 15 p

pThe opinions expressed here are those of the author, a columnist for Reutersp

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pp By Jamie McGeever Editing by Kenneth Maxwellp

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