Column: Hedge Funds Hit the Dollar Right, Yield Curve: McGeever

US 100 dollar bills are seen at a bank in this illustration in Seoul. REUTERS/Lee Jae-Won

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ORLANDO, Fla., Aug 15 (Reuters) – Hedge funds trimmed long dollar positions and bet harder on a flatter yield curve, two macro trades that proved positive.

Last week, the dollar fell to its lowest level on a broad basis since June, while the inversion of the yield curve reached levels not seen in more than 20 years.

The question now for currency and bond speculators is whether they accept the idea that inflation has peaked, the economy will achieve a soft landing, and the Federal Reserve will not tighten policy. monetary policy so aggressively.

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This is a scenario that could keep the dollar under pressure, but steepen the curve and push the 10-year yield above the two-year yield.

The latest report from the Commodity Futures Trading Commission shows that funds reduced their net dollar long position against G10 currencies in the week ending August 9 from $4.4 billion to $13 billion.

This is the biggest reduction since January, and net purchases are now at their lowest since April.

The move was prompted by $1.7 billion changes in the British pound and Japanese yen. The fund’s net long position in dollars against the yen is now just $2.3 billion, the lowest since March last year, and its net short position in sterling has fallen to 2.6 billions of dollars.

The dollar weakened nearly 1% last week and lost 4% last month. The outlook for the dollar is now certainly more balanced.

“Our feeling remains that the dollar’s rally will resume before too long. It will take a lot more good inflation news before the Fed changes course,” Capital Economics strategists wrote on Friday.

PEAK INFLATION?

In bonds, the trend remains fund friendly as the 10-year Treasury yield fell as much as 50 basis points below the two-year yield, resulting in the most inverted curve since 2000.

CFTC data shows speculators increased their net short position in two-year Treasuries for a third week, by more than 70,000 contracts to 172,221. It’s now their biggest bet against treasury bills. Two-year Treasury since July last year.

During the same week, they reduced their net short position in 10-year bonds from just over 9,000 contracts to 286,478 contracts.

A short position is essentially a bet that the price of an asset will fall, and a long position is a bet that it will rise. In the case of bonds, yields fall when prices rise and rise when prices fall.

The hedge funds’ hawkish view of the Fed was also clearly reflected in their rate futures trading.

In the week to August 9, they increased their net short position in three-month “SOFR” rate futures to a record high of 797,342 contracts. Net shorts have doubled in less than three months.

This suggests that speculators are betting heavily on the Fed keeping its foot on the rate hike pedal, perhaps pushing the key federal funds rate well into “tight” territory to ensure it lowers the rate hike. inflation.

But consumer and producer price inflation figures for July released after the close of the CFTC’s latest report showed a noticeable easing in price pressures. It’s only been a month, but some investors’ outlook is changing. Read more

“Near-term, risk assets should trade well as we move past peak inflation concerns,” Citi strategists wrote on Friday.

(Views expressed here are those of the author, columnist for Reuters.)

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By Jamie McGeever; edited by Diane Craft

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

Jamie McGeever

Thomson Reuters

Jamie McGeever has been a financial journalist since 1998, reporting from Brazil, Spain, New York, London and now back in the United States. Focus on the economy, central banks, policymakers, and global markets – especially currencies and fixed income. Follow me on Twitter: @ReutersJamie

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