The market is strongly positioned for a further rise in the dollar, as positioning is now overloaded in the run-up to the crucial Federal Reserve policy meeting on November 3 (FOMC).
The most recent CFTC report on traders’ commitments shows that positioning the dollar higher remains the most popular bet among G10 currencies, as investors now hold their largest net long position in dollars. American since early 2020.
“Most of this long USD position has been built up since the August 24 IMM positioning survey conducted by the CFTC,” said Stephen Gallo, head of European currency strategy at BMO Capital.
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“The position hasn’t gone against those who hold it, as the USD is up about 0.3% since late August, but it hasn’t really been a home run, and it is now quite clear that this is a crowded business, ”adds Gallo. .
The gains for the dollar come as investors bet the Federal Reserve will start scaling back its asset purchase program (ending quantitative easing) in November, while laying the groundwork for a possible rate hike of interest in 2022.
The dollar has also benefited more broadly from an ongoing economic recovery in the United States which has outperformed the global recovery, while intermittent periods of investor sluggishness have also prompted investors to turn to greenbacks.
BMO Capital says the US dollar could rise “roughly the day after the FOMC on November 3, then reverse lower.”
“We still think there should be a little rally of confirmation after the Fed sets its reduction schedule on November 3,” Gallo said.
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The market expects the Fed to announce that it will cut asset purchases on November 3 and offer consistent guidance with a series of interest rate hikes starting in 2022.
Other potential catalysts for a stronger dollar include Powell’s re-appointment as FOMC chairman, especially if that happens by or so November 5, Gallo says.
However, BMO Capital sees the decline in the US dollar last week as a likely taste of what they believe will happen between the November FOMC and the end of the calendar year.
“This is a period when leveraged investors normally resume their positions and the largest currency position they need to unwind is the long USD,” said Gallo.