Dollar Disconnect

In the developed world, the United States stands alone as a hotspot for coronavirus; does that matter for the dollar? More below.  The yen was the top performer last week while sterling lagged. The weekly CFTC positing data report showed continued growth in EUR longs and a sharp drop in bets against the Australian dollar. The charts below break down FX speculative positioning vs USD, showing EUR in the lead, while total speculative positioning (CTAs or hedge funds) becoming net USD short for the 1st time since May 2018. 

The rules of the FX game have been clear for years and the playbook is to buy the US dollar in times of financial trouble. The global need for liquidity in times of high stress was underscored in mid-March when the dollar even surged against the yen.

Yet, we must be careful. The rule may not always hold and a disconnect could emerge as USD underperforms. The last 12 years saw witnessed periods of stress and optimism but the general trend remained for the US economy/US assets – especially tech stocks – to outperform. That and surging demand for USD financing compounded the US safe haven.

COVID-19 is breaking so many rules and one could be the flight to the US dollar. Yes, in a scenario of severe market stress, the dollar will remain a haven, but in a moderately negative period of USD and US asset underperformance, the dollar could easily struggle. We saw this in at the peak of the USD relative in 2007-2008, when global currencies hit long-term highs vs the greenback.

Why mention this now? Because it's increasingly clear that the coronavirus is out-of-control in parts of the US while it grows increasingly under control in other G10 countries. If that divergence intensifies--along with the rebound of the long-beaten EU asset valuations, don't rule out capital flows away from the US and the US dollar. For now, it's not in play but is something to keep in mind as we watch US cases continue to climb. 

Ashraf reminded me that we could also mention how the twin US deficits are surging far and above their EU and Japanese counterparts with no yield to compensate for that deterioration or with US holdings of US treasuries sustaining their bigest fall in 3 decades. But we won't get into that now. 

There are currently two USD-related trades in the Premium Insights, 1 of which is long USD. 

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +117K vs +96K prior GBP -16K vs -24K prior JPY +22K vs +17K prior CHF +2K vs +2K prior CAD -25K vs -26K prior AUD -7K vs -37K prior NZD -9K vs -11K prior

AUD net positioning has been short for two years but with the short-covering last week, the net position is the least-short since June 2018.