The week that was
There was no respite to the downward trend for the US Dollar (USD) this week, which added to the prior week’s retracement and at some point flirted with the area of four-month lows.
Indeed, after trading at levels just shy of its psychological 100.00 barrier early in the month, the US Dollar Index (DXY) has come all the way down to challenge the 98.50 zone, extending its negative streak for the third month in a row.
There was no BoJ-MoF FX intervention chatter; nothing big has moved on the geopolitical front other than the continuous (and boring) up-and-downs over who fired first and radio silence from Federal Reserve (Fed) officials due to the usual pre-Fed blackout period. The only asset that keeps reacting to the Middle East crisis is, exclusively, crude Oil.
Not even the US money market, with a needle-like move in the short end of the curve, was able to provide some fresh oxygen to the Greenback.
And then came the long-awaited US inflation figures, showing that consumer prices kept running hot last month and, of course, well above the Fed’s target. Seeing the weight that inflation carries on Chair Kevin Warsh’s Fed, investors may seem a tad more convinced that a rate hike is coming at the Fed’s next week’s meeting.
Consensus keeps leaning hawkish… ish
The vast majority of comments from Fed rate setters in the last few weeks have kept strengthening the case that inflation remains elevated, no doubt about that, although opinions on what to do next have been… mixed, particularly when it comes to timing.
Since most of the FOMC members fall in line with the view that consumer prices need to resume their downtrend to the bank’s goal, some of them advocate for the sooner-the-better rate hikes, while others appear more inclined to an extra dose of patience.
Chair Kevin Warsh has been clear that bringing inflation down from current levels is of the utmost importance. The labour market can wait; it looks well and sound for now.
Meanwhile, markets expect nearly 50 basis points of tightening by year-end, while a 25-basis-point rate increase remains the favoured scenario for the Wednesday meeting.
Bearish pressure builds
The bullish positioning in the US Dollar weakened further in the week ending September 1. Indeed, according to Commodity Futures Trading Commission (CFTC) data, non-commercial net longs fell to just over 17K contracts, extending the recent decline. In addition, the 4-week change also turned negative at around -5.5K contracts, confirming that the broader positioning trend has shifted lower.
Additional data saw open interest increasing to a bit more than 50K contracts, or roughly 4.3%. Since net positioning deteriorated while participation rose, the move points to fresh bearish positions being established rather than simply an unwind of previous longs.
Furthermore, speculative exposure declined to 34.04% from 38.96%, with its percentile falling to 50.9, while the net-position percentile also eased to 63.9. Both measures remain above neutral, but the latest readings indicate that the Dollar’s historically constructive positioning advantage is fading.
In summary, USD positioning remains net long but has become increasingly fragile. The combination of rising open interest, declining exposure and a negative 4-week trend suggests that bearish momentum is building. A continued deterioration would strengthen the case for a broader shift away from the Greenback.
What’s next for the buck
Next week will be an interesting one: the FOMC gathering, of course, will garner all the attention. However, the release of the updated Summary of Economic Projections (SEP) will turn the meeting even spicier.
Strictly data-wise, the publication of Retail Sales should remain the salient point alongside housing figures.
A special mention must be made regarding the Bank of Japan (BoJ) interest rate decision, as markets have already been fantasising about a rate hike for the last couple of weeks.
The Fed’s last inflation battle could be the toughest yet
The easy part of the inflation story now appears to be behind us. Price pressures have retreated markedly from their post-COVID highs, but bringing inflation down from above 3% to the Fed’s 2% target is proving considerably more challenging than the initial decline from those elevated “pandemic” levels.
That backdrop should continue to underpin the US Dollar. As long as underlying inflation remains persistent, the Fed is likely to stay cautious about easing policy too quickly, helping preserve the Greenback’s yield advantage over many of its major peers.
However, concerns over the US fiscal outlook and an uncertain global environment could continue to support the buck as a relative safe haven, suggesting no rush from investors to steer away from the USD… for now.
