More traders are short the dollar than any time in the past 4 years
From Stansberry NewsWire:
According to Bloomberg, being short the US dollar has become the most popular trade in FX as hedge funds have jumped in. The CFTC’s Commitment of Traders data showed the short position in the dollar has reached its highest level in more than four years.
The short dollar impetus, especially versus the euro, has increased ahead of the Fed’s Jackson Hole symposium and the potential for European Central Bank president Mario Draghi to discuss unwinding stimulus. I would regard stimulus withdraw in the same vein as raising rates because it effectively diminishes liquidity – a less available store of value is worth more.
However, considering so many hedge funds are short the dollar and the amount of short interest is higher than it has been in over four years, one must ask, what can Mario Draghi say to get the euro moving higher and the dollar moving lower? Probably not a lot. Expectations are for Mr. Draghi to pull the punch bowl. If he does anything less, it will come as a disappointment and all the “euro long versus short dollar” hedge fund positions must unwind. They will buy the dollar and sell the euro. Best case near term scenario, he pulls the punch bowl and nothing happens to either currency. Even then, investors who have been making money on this move lower in the dollar could very well see their thesis come to fruition, have made money, and use the event as a reason to exit the trade.
Longer term, there could be more pain in store for the U.S. dollar if the White House can’t get their growth agenda implemented but near term it feels like there could be upside in the dollar. I would keep an eye on the Powershares DB US Dollar Index Bullish Exchange Traded Fund (UUP) near term for a potential trade higher.
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