20 September 2019
Speculators have built net long dollar positions since last year, and have maintained those positions so far. Photo: Reuters
Speculators have built net long dollar positions since last year, and have maintained those positions so far. Photo: Reuters

US dollar likely to stage fresh rebound

The US dollar has shown signs of renewed strength, weighing on other currencies and commodities.

Are big investors now more optimistic about their dollar positions? And has this made dollar trading the most crowded in the forex market?

The Fed rate hike is just around the corner, while European and Japanese central banks are planning to expand their monetary easing programs.

As a result, the US Dollar Index (DXY) has rebounded after trading sideways for past several months.

Currently, the benchmark is still hovering below 100. But if it breaks the previous peak of 100.33 set early this year and even rally further to 101.5, the greenback may extend its rally that started in mid-2014.

The dollar usually moves in opposite direction to various commodities. A one-way rise of the US dollar may exert pressure on oil, gold and base metals.

In order to gauge investors’ view on the US dollar, we need to review DXY positions, which would directly reflect the positioning of speculative investors.  A higher level of net position shows that they are confident in the DXY, and vice versa.

Meanwhile, currency values are relative, and if investors are bearish on other currencies like the euro or yen, that indirectly reflects their confidence in the dollar.

The DXY has a net position of 43,000 contracts, and it has reported a net long position for 76 straight weeks since early June last year.

That shows speculators have been ready since mid-2014 ahead of the dollar rally. Nevertheless, the net long position is similar to that before mid-2014, when the US dollar was at its peak.

The net long position has dropped by nearly a half from the high level at the start of the year.

As of last week, combined net long position of eight other currencies futures reached 267,000 contracts, up more than 40 percent from the week before. These contracts are worth over US$30 billion.

This means speculators are also bullish on the dollar from their positioning in other currencies.

Net positions of DXY and other currencies futures account for 51.6 percent and 17.5 percent of their respective open interest, which are relatively low compared with the peak early this year.

This has shown that speculators have already built net long positions of the US dollar since last year, and they have maintained those positions so far.

If so, is long dollar the most crowded trade?

The Fed has been hesitating to move since it completed its tapering at the end of last year. That triggered a rally in the US dollar after the first quarter of this year, and then trade became range-bound in the following six months.

And net long positions of both DXY and foreign currencies futures came off during the period, indicating that many investors have already taken profit and unwounded their positions.

The net long position of the US dollar has picked up again in recent weeks, but still below the peak level in the year start.

The net long position might sustain for a while if US dollar posted a one-way rally. The dollar is more likely to stage a fresh rebound as shown by the positioning of other currencies.

This article appeared in the Hong Kong Economic Journal on Nov. 19.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal chief economist and strategist