U.S. dollar bulls are alive and well despite a lot of negative talk about the currency, according to data compiled by TD Securities in an effort to bridge the gap left by a lack of positioning data from the Commodity Futures Trading Commission as a result of the 35-day government shutdown that ended last month.
If correct, that’s a contrarian signal that should cheer dollar bears.
The lack of up-to-date commitments-of-traders data, which breaks down long and short positions by various classes of market players, including speculators and commercial firms, has left traders flying partially blind. The deal that was struck to reopen the government, only guaranteed three weeks of operations. Meanwhile, the CFTC continues to play catch-up, on track to release data covering data through the first week of January next week.
Traders use the CFTC data to track how different groups of traders are positioned and how those positions have evolved over time. Often, outsize long or short positions by speculative traders are viewed as contrarian signals.
TD Securities said it built its own indicator that attempts to gauge positioning based on currency trading advisor models and the beta of macro hedge fund to FX returns. Besides, the “CFTC data also has well-known drawbacks, such as being more coincidental than forward-looking, which has led us to build out a few alternative indicators ourselves,” wrote Mark McCormick, North America head of FX strategy at TD Securities in a note.
McCormick’s analysis showed “that while there is much talk of a weak U.S. dollar, positioning still leans the other direction. Our signals also imply that we are not even close to neutral yet.”
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Even if the market trimmed some exposure, it leaves “plenty of wood to chop and even further to go if the market starts to turn short the dollar.” So a full reversal would be a huge reshuffle.
“Our macro narrative rests on a shift, and reversal, of the 2018 #maga story, which should reinforce the reversal of positioning, especially in the high beta space and a handful of European currencies,” McCormick said.
The ICE U.S. Dollar Index DXY, +0.22% , a popular gauge of the greenback that measures it against six of its rivals, was up 0.3% at 96.088 on Tuesday, having fallen 0.1% in the year so far.
Last week’s dovish turn by the Federal Reserve, in which the central bank signaled rate moves are on hold until further notice, effectively pausing the rate-hike cycle, hit dollar sentiment hard. But other themes from last year, such as supportive government stimulus, have also been petering out, inspiring a generally sour tone on the U.S. currency among market participants.
Besides the buck, “our work shows, that the Australian dollar, Canadian dollar, British pound GBPUSD, -0.6674% , euro EURUSD, -0.2011% and the Scandis remain widely held short positions, offering some runway as the king dollar narrative loses its luster,” McCormick said.
The market has been short the volatile Australian dollar AUDUSD, +0.0969% for most of the past nine months, McCormick added.
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The Australian currency is a proxy for risk, commodities, global growth and China, which has been weighing on it for months.
But the bearishness may have gone too far, the TD strategist said, arguing that the Aussie dollar “looks more attractive against our China factor index.” Similarly, the U.S.-Canadian dollar pair USDCAD, +0.2059% is another currency “that we think consensus has turned too bearish on and think we have room to push lower as the first quarter progresses.”
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