Funds cashing in on large short dollar position: McGeever

ORLANDO, Florida, July 16 (Reuters) – Hedge funds have been positioned for a weaker dollar all year and those bets are paying off handsomely, especially against the Mexican peso, Brazilian real and sterling.

The latest Commodity Futures Trading Commission data for the week to July 11 show speculators held their largest net long sterling position since 2007, and their biggest bullish bet on the Mexican peso and Brazilian real in three years.

Overall, the funds’ net short dollar position against a range of currencies was worth some USD 13.17 billion, down slightly from USD 13.58 billion the week before.

It is still a substantial overall bet on the dollar falling, however, and marks the 36th week in a row funds have been net short. It is comprised of a near USD 10 billion aggregate bet versus G10 currencies and USD 3.5 billion versus emerging currencies, namely the peso and real.

To be ‘long’ an asset is essentially a bet that it will rise in value, while to be ‘short’ is effectively a bet that it will depreciate. Investors often use futures contracts to hedge positions, but the CFTC data are often a pretty good guide to hedge funds’ directional view on a given asset.

Funds’ net long peso position crept up to 96,000 contracts in the week to July 11, nudging the post-pandemic high of around 100,000 contracts from late last month, and bullish momentum in the Brazilian real is the strongest since April.

Both currencies have been stellar performers lately – the real has only registered three weekly declines against the dollar in the last 17 weeks, and the peso has fallen five.

The peso’s performance has been especially impressive – it closed on Friday at its strongest level since 2015 and is up 16% against the dollar year to date, powering toward its biggest annual gain on record.

The question now is how much more juice is in the bearish dollar trade given how gloomy the consensus view now seems.

Disinflationary forces are gathering momentum, and traders are betting heavily that the Federal Reserve will deliver its final interest rate hike later this month and then cut rates aggressively next year.

“Signs of further improvement in the global growth-inflation mix and a US soft landing sow the seeds for dollar weakness ahead,” HSBC analysts wrote last week in a global outlook.

The dollar index, a broad measure of the greenback’s value against a basket of major currencies, slumped 2.4% last week, its biggest fall since November. JP Morgan’s emerging market currency index jumped 1.6%, its biggest rise in six months.

In terms of CFTC funds’ positioning in the major currencies, the most significant shift was in sterling. Funds extended their net long sterling position by around 5,000 contracts to over 58,000, the biggest net long since 2007.

That’s a USD 4.7 billion bet on a stronger pound centering on sticky UK inflation versus US disinflation. While more than 100 basis points of US rate cuts are priced into the 2024 curve, traders are expecting some 100 bps of UK rate increases over the next 12 months.

Sterling traded above USD 1.31 last week for the first time in over a year and is up 8% against the dollar so far this year.

(By Jamie McGeever; Editing by Himani Sarkar; The opinions expressed here are those of the author, a columnist for Reuters.)