In the wake of last week's dovish decision from the Federal Reserve, investors have been throwing in the towel on the U.S. dollar.
But Bank of America Merrill Lynch's proprietary positioning data suggests there's still another major shoe to drop for the greenback. In a note to clients, FX Strategists Myria Kyriacou and Athanasios Vamvakidis illustrate that hedge funds' long position in the U.S. dollar remains substantial relative to the past 12 months and to other investors.
"Real money is now short USD for the year, but hedge funds remain long, pointing to risks for a further squeeze USD lower," they conclude.
Real money, in this case, refers to pension funds, real estate investment trusts, smaller asset managers, and the like. The strategists note that these parties often use foreign exchange positions to carry out trades in equities or debt, and therefore they may not be expressing a view on the currency itself. However, the positioning of this 'real money' does imply something about the appetite for assets denominated in U.S. dollars, an important factor for the currency.
During an interview on Bloomberg TV, Vamvakidis said that any advances in the U.S. dollar going forward, both against other developed market currencies and their emerging market peers, would not be broad based.
"We're not going to see an overall strengthening trend of the dollar across the board," he said. "We do expect the dollar to be stronger against the euro, not against the yen."
After largely treading water to open the year, the U.S. dollar has weakened as market participants have had doubts about the extent to which monetary policy stateside can diverge from the rest of the world. The U.S. dollar index and trade-weighted broad dollar index are both off roughly five percent from their recent respective peaks.
"The market remains short [emerging market currencies] against the dollar, not as short as a few weeks ago given the recent rally, but we believe there is a further squeeze of this position ahead," asserted Vamvakidis.