Impact of U.S. Rate Cut Expectations on Hedge Fund Dollar Bets
U.S. Rate Cut Expectations Prompt Hedge Funds to Reevaluate Dollar Optimism
Following the rise in U.S. rate cut expectations for next year, hedge funds are cooling their optimism on the dollar. This shift in sentiment could potentially weaken a key support for the currency in the coming months.
Hedge Funds Slash Bullish Dollar Bets in Half
The latest Commodity Futures Trading Commission (CFTC) data reveals that funds significantly reduced their net long dollar position against major and emerging currencies. In just one week, the position halved from $10 billion to $4.5 billion, marking the largest week-on-week swing since July.
Market Response to Interest Rate Futures
This significant change in sentiment coincided with interest rate futures markets pricing in up to 100 basis points of Fed rate cuts by the end of next year. While this dovishness has slightly tempered in recent days, traders remain steadfast in their anticipation of substantial easing in the second half of next year.
Implications for the Dollar’s Strength
The recent data from CFTC suggests that hedge funds are pausing their dollar-buying spree in response to evolving market conditions. The potential for a more lasting shift will largely depend on the Fed’s actions and the state of the global economy.
JP Morgan’s Currency Strategy Team Outlook
According to JP Morgan’s currency strategy team, significant dollar weakness would require Fed rate cuts and improved growth outside the U.S. However, these conditions have not yet been met, underscoring the uncertainty surrounding the currency’s future trajectory.
Long-Term Impact of Hedge Fund Positioning
Historically, CFTC funds’ net dollar positions have been long-term, directional trades held for at least a year. However, the current landscape may be different, with funds holding net long positions for only nine weeks.
Shifts in Euro and Japanese Yen Positioning
The recent liquidation of long dollar positions was primarily against the euro and Japanese yen. Funds expanded their net long euro position significantly, while also cutting their net short yen position, signaling potential shifts in these respective currency pairs.
Outlook for the Japanese Yen
Positioning in the yen remains stretched, and the potential for the currency’s upside is significant if the Bank of Japan signals an end to negative interest rates in the near future. This could have far-reaching implications for the yen’s value against major currencies.
Morgan Stanley’s FX Strategy Team Prediction
Morgan Stanley’s FX strategy team foresees the yen as the broad-based outperformer, with potential implications for its exchange rates against major currencies in the coming years.
The opinions expressed here are those of the author, a columnist.
