Hedge Funds Capitulate on Dollar Short Bets as Losses Mount

(Bloomberg) — Hedge funds have capitulated on their short-dollar bets after surging Treasury yields upended a favourite international macro technique.

Leveraged funds flipped to grow to be internet consumers of the world’s reserve foreign money through the week to March 16 — a tumultuous interval that noticed Treasury yields breaching key ranges on feverish inflation fears. They added bearish bets on the yen and euro, and switched from bullish positions on the New Zealand greenback, knowledge from Commodity Futures Trading Commission present.

The nice unwind could be gaining traction, some strategists mentioned.

“It is the bond market that has been driving the U.S. dollar in the past couple of months, and it appears to be intensifying,” mentioned Alvin T. Tan, head of Asia foreign-exchange technique at RBC Capital Markets. “I would expect further short-covering versus the U.S. dollar.”

An intensifying debate over the tempo of inflation features has cut up traders, with some seeing Treasury yields hovering to 2% as a world restoration takeoff with vaccine rollouts and stimulus spending. That in flip is trouncing one in every of Wall Street’s hottest macro calls of 2021.

Holding greenback shorts would have served merchants a 1.8% loss this 12 months after being a worthwhile technique in eight of the 9 months via to December, Bloomberg knowledge exhibits.

Dollar shopping for by hedge funds rose to probably the most since August 2014, in response to an evaluation by Australia & New Zealand Banking Group Ltd. strategists together with Khoon Goh. “With U.S. 10-year bond yields poised to rise further, expect financial market volatility to increase,” he mentioned.

Hedge funds’ lengthy greenback positions climbed to 2,414 contracts, in contrast with shorts of 62,781 every week earlier, in response to CFTC knowledge on seven main currencies aggregated by Bloomberg. It is the primary time they’re bullish on the dollar since November.

The Bloomberg Dollar Spot Index rose 0.1% on Monday after the Turkish lira’s plunge spurred demand for haven belongings.

“U.S. Treasury yields and virus dynamics will probably determine where the leverage community will land,” mentioned Rodrigo Catril, foreign money strategist at National Australia Bank Ltd. in Sydney. While the pound and commodity-linked currencies have risen in opposition to the greenback this 12 months, “any question marks on vaccine supplies or commodity weakness will likely see these pairs come under pressure.”

(Updates with analyst feedback in seventh paragraph)

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