Dollar Rally Backed by Currency Fund, Snubbing Citigroup Caution

  • Macro's Farrington says may add to dollar longs before FOMC
  • Dollar Index poised for biggest monthly advance since January

U.S. Climbs Path Back to 1990's 'Rubin' Dollar

Sometimes you can’t have enough of a good thing.

That’s the position the $7.7-billion Macro Currency Group is taking as it anticipates building on bullish positions in the dollar even as the currency’s recent surge prompts some to warn of a correction lower. In an event-packed December, investors are focusing on a European Central Bank meeting Dec. 3, followed a day later by U.S. employment data for November and the Federal Open Market Committee decision Dec. 16.

“As we have done all year, we are more inclined to trade the run of strong U.S. data than simply Fed ‘lift-off’ expectations,” said Mark Farrington, the London-based managing partner at Macro Currency, a unit of Principal Global Investors LLC. “We remain long dollars in a number of portfolio themes. These positions are likely to be built up in advance of the FOMC, not reduced.”

Source: Intercontinental Exchange Inc., Commodity Futures Trading Commission

The dollar strengthened in November as the biggest gain in non-farm payrolls this year and an upgrade to gross domestic product cemented the U.S.’s economic vitality at a time when policy makers from New Zealand to China and the euro area are resorting to stimulus. The stronger data also helped push the odds to 72 percent that the Fed will raise its benchmark rate next month for the first time in a decade. 

Reversal Risk

Traders who have cheered the greenback’s 11 percent surge this year are now being warned by at analysts at banks including Citigroup Inc. and Societe Generale SA about the risk of a move lower as some investors close long bets and book profits amid decisions by the Fed and ECB whose officials have been transparent about their readiness to act.

Intercontinental Exchange Inc.’s U.S. Dollar Index, which tracks the greenback against six peers, was at 100.120 as of 12:55 p.m. in Tokyo Monday, after climbing 3.3 percent this month, the most since January. It reached 100.390 in March, the strongest level since 2003.

Large speculators increased bets that benefit from greenback appreciation by a net 92,293 contracts in the week through Nov. 17, the biggest increase since August 2014, data from the Commodity Futures Trading Commission show. Positions for the week through Nov. 24 will be released later Monday.

“The run of data over the next two weeks for the U.S. will be solid, and long dollar positioning is not dangerously large,” Farrington said in a Nov. 26 e-mailed response to questions. “There are a number of central banks that have the potential to cut rates before the FOMC, and the November NFP number is expected to be strong,” he wrote, referring to nonfarm payrolls.

Take Profit

Investors shouldn’t wait until the FOMC to take profit on bullish bets and some long positions may be closed even before the ECB meeting if investors feel “all reasonable dovishness is priced in,” Steven Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy, wrote in a note to clients last week. The chances of a correction in the dollar “are huge” following the Fed meeting, Kit Juckes, a London-based global strategist at Societe Generale, wrote in a note Friday.

Expansion in U.S. service industries remained robust after growing at the second-fastest pace in a decade in October, a report Thursday is forecast to show. American companies probably added 200,000 jobs in November, according to a Bloomberg survey before the data Friday. That would follow last month’s gain of 271,000 positions.

In addition to the ECB, policy makers in New Zealand and Russia are also forecast to lower benchmark rates in December. 

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