- The US dollar is still in strong demand from currency speculators.
- Net long positioning, hedge funds and other leveraged investors are at the highest level since November 2015.
- The collapse of the Turkish lira saw the USD break above its recent trading range at the end of last week.
The US dollar was back in demand across the board last week.
ANZ’s summary of weekly trader positioning from the US Commodity Futures Trading Commission’s (CFTC) showed that both leverage funds (such as hedge funds) and institutional investors were net buyers of US dollars.
“Leveraged funds added $US2.8 billion to take their overall net long USD positions to $US29.8 billion — the highest net longs since November 2015,” said ANZ analysts Irene Cheung and Rini Sen.
It marks a sharp turnaround from March this year, when net short positions among leveraged funds reached their highest since March 2014.
The reversal can be seen in this ANZ chart, which shows US dollar positioning overlaid against movements in the US dollar index (DXY).
Big asset managers also got in on the action, although they are still net-sellers of the US dollar.
Last week, they “pared back their overall net short position by $US0.5 billion to $US13.5 billion, ending three straight weeks of net selling,” ANZ said.
Net positioning is the sum of long and short options and futures positions in a particular asset — in this case the US dollar.
The data provides a snapshot of market positioning at the close of business each Tuesday.
So last week’s report was prepared in advance of further USD strength on Friday night, following a strong US inflation print and the collapse of the Turkish lira.
In view of that, markets “could see a further build-up in net USD longs amid heightened market uncertainty,” the analysts said.
Last week also saw a shift in demand for the euro, which is the US dollar’s biggest trading pair.
“The euro saw net selling by both leveraged funds and asset managers after three weeks of net buying,” ANZ said.
Leveraged funds increased their net euro short positions to $US11.9 billion. Asset managers also reduced their long bets by $US0.9 billion, but their overall position remains net-long at $US22.3 billion.
The UK pound also got sold off amid ongoing Brexit uncertainty, while commodity currencies were mixed.
“Both AUD and NZD saw net selling by funds but net buying by money managers in the week,” ANZ said.
For clarity, ANZ describes leveraged funds as “typically hedge funds and various types of money managers on the ‘buy side’”.
Asset managers are “‘buy side’ investors, including pension funds, mutual funds and investment managers whose clients are predominantly institutional”.
With overall net-long positions among leveraged funds now at multi-year highs, it creates the potential for covering trades should there be a catalyst for the USD to weaken.
However, the collapse of the Turkish lira saw the US dollar index break above its long-term trading range on Friday, and it remains above 96 in Asian trade this morning.
Continued strength in the US economy and steadily rising inflation has reaffirmed the market’s expectations for the US Fed to continue raising interest rates in the second half of the year.
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