Column-‘TINA’ still driving hedge funds bullish dollar view: McGeever

div classBodysc17zpet90 cdBBJodivpBy Jamie McGeever

pORLANDO, Fla. Reuters – Being long dollars will no doubt become an overcrowded trade at some point and a reversal will ensue, but for hedge funds right now, there is no alternative. pdivdivdiv classBodysc17zpet90 cdBBJodiv

Funds have amassed their biggest bet in six months that the dollar will strengthen against the worlds major currencies, and you can understand why.p

From widening interest rate and yield spreads, favorable relative growth prospects, and safehaven flows amid exploding equity and cryptofueled market volatility, there are many factors behind the greenbacks ascent to a 20year peak.

The latest Commodity Futures Trading Commission data show that funds increased their net long dollar position against G10 currencies to 20.6 billion in the week to May 10 from 19.8 billion the week before.

That is the biggest net long position since early December last year. The bullishness is broadbased – funds are long dollars against all major currencies except the euro, and that short position is very small by historical standards.

A long position in an asset or security is effectively a bet that it will rise in value, and a short position is the opposite.

Graphic: CFTC dollar positions & dollar index https:fingfx.thomsonreuters.comgfxmktjnvwezgwlvwUSDCFTC.jpgp

Graphic: CFTC net dollar position & dollar index https:fingfx.thomsonreuters.comgfxmktzgpomewrzpdUSDCFTC2.jpg

The dollar index, a measure of the greenback‘s value against a basket of major currencies, rose above 104.00 on May 9 for the first time since December 2002, lifted by the Federal Reserve’s halfpercentagepoint rate hike and a pledge from Fed Chair Jerome Powell that further 50basispoint moves are coming.

6 BILLION BET AGAINST STERLING

Analysts at Goldman Sachs estimate that the dollar is overvalued by 18 but are cautious on calling for a correction, while analysts at Barclays note that the dollar looks stretched but raised their forecasts regardless.

“More expensive for longer,” Barclays wrote on Monday.

There‘s a debate to be had about how much the Fed will ultimately tighten – the terminal rate implied by pricing on the Secured Overnight Financing Rate SOFR has fallen to 3 from almost 3.50 on May 4, the day of the Fed’s policy decision – but most observers believe it will still be significantly more aggressive than its peers.p

For example, the Bank of England also raised rates again this month, but warned of recession risks and the possibility of doubledigit inflation. This was not what sterling wanted to hear, and its downdraft accelerated sharply.

CFTC funds have consistently been short the pound since midNovember, apart from the week before Russia invaded Ukraine in February. They have been short every week since – that bet is now worth more than 6 billion – and on Friday sterling hit a twoyear low of 1.2155.

Graphic: CFTC sterling positions https:fingfx.thomsonreuters.comgfxmktakvezrgajprCFTCGBP.jpg

The European Central Bank is steering markets towards a likely rate hike in July, but the hawkish noises are being utterly drowned out by recession alarm bells. The euros slide towards parity with the dollar is starting to worry ECB officials.

CFTC funds flipped back long euros in the latest week, a weekonweek position swing of almost 3 billion. But those longs will have been crushed by the currencys slump to as low as 1.0350.

pDerek Halpenny at MUFG reckons the euros 2017 low of 1.0340 is the last line of defense before 1.00 and the first time at parity since 2002. If hedge funds are thinking along the same lines, they may might be flipping to a net short euro position soon enough.

Related columns:

Stirring ingredients of 1985s dollarcapping Plaza Accord Reuters, May 11

Sterling tailspin as BoE maps 10 inflation and recession Reuters, May 6

Fed fingers crossed for 1994 rerun as hiking path shortens Reuters, May 5

Fraying central bank consensus spurs dollar and market stress Reuters, May 4

The opinions expressed here are those of the author, a columnist for Reuters

By Jamie McGeever Graphics by Saikat Chatterjee, Joice Alves and Karen Brettell Editing by Paul Simaop

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