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Positioning won't stand in the dollar's way, the data suggests.
Analysis from Lloyds Bank leans on the view that the dollar's advance won't be challenged by market positioning, while spread differentials are also supportive.
"Long dollar bets have been building, but they don’t look stretched yet," says Lloyds analyst Nick Kennedy in a daily market note.
The dollar index - a broad measure of U.S. dollar value - has rallied some 3.75% since September, raising questions about whether the market is risking overcommitting to the trade.
However, the rally to 17-month highs at 102.40 "interestingly... hasn’t been accompanied by a pronounced shift in speculative positioning," says Kennedy.
Market positioning plays an important role in currency movements, with the rule of thumb being that heavy speculative positioning in either direction can begin to act as a headwind: after all, if everyone is betting the same way, who takes the other side of the bet?
It is also oftentimes a good contrarian indicator of the potential for a reversal: a speculator might choose to bet against the dollar when noticing that positioning is crowded, because when a reversal occurs the capitulation in positioning can be significant.
Analysis from Lloyds suggests the tick-up in long dollar positioning is as much about the rise in short bets against other currencies as anything.
"Looking at the latest open interest shifts, more bearish EUR and GBP bets were added into last weekend, but this still won’t push overall positioning into stretched territory. And these late additions are likely to be exposed to any nearer-term volatility," says Kennedy.
His analysis also suggests the FX move looks equally reasonable looking at the evolution of interest rate differentials.
"Although the market has backed away from October Fed hike bets following downward revisions to PCE and a soft payrolls number, Eurozone and UK swap rates have outperformed across most of the curve (beyond 18 months over the past week), adding to the dollar’s carry lure. We’d posit that has room to extend with financial conditions still looking relatively easier in the US than Europe," he explains.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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