Hedge Funds Misread Fed With Added Bullish Dollar Bets

  • Dollar bullish wagers jumped by a third in week to Sept. 20
  • Fed has scaled back outlook for rate increases in 2017

Hedge funds and other large speculators raised bullish dollar wagers to a seven-month high before the Federal Reserve scaled back the outlook for rate increases in 2017 at last week’s policy meeting.

Wagers for the dollar to gain against eight major peers jumped by a third to a net 150,620 positions in the week to Sept. 20 compared with the previous period, according to the latest data available from the Washington-based Commodity Futures Trading Commission. A gauge of the greenback sank by the most in two weeks the following day, as the Federal Open Market Committee opted to give the economy more room to run and stood pat for the sixth time this year. Futures indicated just 22 percent odds of action at last week’s meeting ahead of the announcement, and currently signal a 55 percent chance of higher rates by year-end.

“We are modestly bearish on dollar near-term in the wake of the FOMC’s latest procrastination,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “Three months is a long time to wait for a rate hike that might not come, and we expect U.S. data to generally keep surprising to the downside.”

Dollar Bets

The Bloomberg Dollar Spot Index was little changed as of 7:13 a.m. in London from Friday, when it completed a 0.6 percent weekly decline, its biggest in more than a month. The greenback slipped 0.1 percent to 100.89 yen, and was at $1.1227 per euro from $1.1226.

The dollar bets represent the sum of net futures positions for the U.S. dollar against the euro, yen, Aussie, kiwi, pound, loonie, Mexican peso and the Swiss franc. A positive number  means there are more long bets than short bets, and a negative would mean more shorts than longs.

Westpac’s Callow expects the yen to strengthen past 100 per U.S. dollar this week and the euro to push above $1.13 though he remains wary ahead of the first debate between U.S. presidential candidates Hillary Clinton and Donald Trump later Monday. A stronger performance by Trump could hurt risk appetite and support the greenback against currencies such as the Canadian dollar and Mexican peso, he said.

The U.S. central bank scaled back the outlook for rate increases in 2017 and beyond, undermining bets the greenback would strengthen while central banks in Japan and Europe further debased their currencies with stimulative policies.

The Fed’s “dot plot,” which it uses to signal its policy outlook, shows that officials expect a one quarter-point rate increase this year, followed by just two next year. In January, policy makers were calling for four hikes this year followed by another four in 2017.

“Over the medium to longer term, we continue to expect U.S. dollar weakness versus G10 and emerging market currencies based on a China slowdown, weak energy prices and underpricing of monetary policy normalization in the U.S.,” Goldman Sachs Asset Management said in a note to clients dated Sept. 23.

(Corrects number of currencies in the second paragraph.)
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