Hedge funds are rapidly reducing their USD downside risk exposure, and at this rate, they could become bullish by month-end.
Hedge funds has been unwinding their exposure to downside risk for the US dollar fast and at the current pace of buying they will turn bullish by the end of the month.
They cut their net short dollar position to $7.17 billion, the smallest bet since mid-June and a third of what it was six weeks ago, according to the CFTC.
Recent history suggests that the trend will likely persist for longer after those funds go long dollars. After former Fed Chair Bernanke shocked markets with ‘taper tantrum’, funds went long dollars accordingly and that last for almost four years in a row.
As such the dollar may find itself on a solid footing in the long run despite growing expectations for the Fed to end its rate-hike cycle. Economic divergence between the US and EU also adds to the dollar’s strength.
The EU economy will expand by just 0.8 per cent this year and 1.4 per cent in 2024, according to European Commission figures. German real GDP is expected to shrink by 0.4% this year and grow by 1.1% next year.
Europe’s economic outlook has weakened in recent months because of a downturn in manufacturing, faltering trade with China, less fiscal support and weakening consumer spending. That fuelled speculation that the ECB will pause its interest rate rises on Thursday.
The euro is still under selling pressure against the dollar from a technical viewpoint, but traders may be reluctant to place decisive bets ahead of Wednesday’s inflation report which is always a market-moving clincher.
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