Shorting the dollar proves to be uncomfortable too

A rising greenback has strategists questioning their calls

NEW YORK: It’s a tough time to be holding onto a short position, and not just for equity investors caught out by Reddit-fuelled price surges.

In the currency market, one of the big consensus calls for 2021 has had a rough January, with the US dollar defying expectations for it to extend its decline – at least for now. The Bloomberg dollar index, which measures the greenback against a basket of major peers, is up 0.9% since the end of 2020 and on course for only its second monthly gain since the coronavirus pandemic rocked markets back in March.

That may cause some pain for traders betting the other way, although positioning data from the Commodity Futures Trading Commission shows that speculators have so far been largely undeterred.

Net shorts on the greenback increased this month, and stayed close to the multi-year high reached in September even after a slight pullback in the week ended Jan 26. And even with the January rebound, the dollar gauge remains around 13% below its peak from March.

A recent Bank of America survey showed that shorting the greenback was the second most popular trade among investors, and it’s easy to see why: the rollout of vaccines and the prospect of additional US fiscal stimulus promise to usher in an era of global growth that should buoy risky assets and weigh on the dollar, which is often seen as a haven in times of trouble.

But that’s not what’s played out in January and some observers see the recent strength persisting.

“We will have a period where the US outperforms many economies around the world and as a result US rates will move higher,” Brad Bechtel, global head of foreign exchange at Jefferies Financial Group and a self-described “anti-bear,” said in an email Friday. Most importantly, he sees real rates, which take into account the impact of inflation, moving higher and helping to lift the greenback.

The surprise rebound has prompted some strategists to start questioning their calls for a weaker greenback. ING Groep NV’s bearish dollar view for 2021 is predicated on the Federal Reserve keeping policy “very loose” and on a synchronised global recovery that provided “attractive alternatives outside of the US,” the firm’s Chris Turner wrote in a note. But these premises are coming into question.

Fed chair Jerome Powell has said that officials were a long way from withdrawing their aggressive support for the economy. However, ING’s dollar call might be due for a review if the central bank applies the brakes sooner than expected amid the vaccine rollout and the prospect of more stimulus, and if extended lockdowns in Europe push back the timing of the global recovery.

Yet, some aren’t swayed by these concerns. Goldman Sachs Group Inc’s co-head of currency and emerging market strategy Zach Pandl said new Covid-19 variants and vaccine distribution bottlenecks have not meaningfully affected his firm’s global growth views. Coming into 2021, it was clear there would be a gap between vaccine approval and herd immunity.

“We continue to expect trend depreciation in the broad US dollar due to the currency’s high valuation, low nominal and real interest rates, and a recovering global economy,” Pandl said. “Despite this month’s setbacks, we believe the dollar downtrend remains intact.” ─ Bloomberg

The Star, 01 February 2021 (Monday)