According to National Bank of Canada analyst, Krishen Rangasamy, recent strength seen in the US dollar could be the consequence of speculators taking long “non-commercial” positions on the USD and warns about a potential reversal.
Key Quotes:
“The trade-weighted U.S. dollar is now within a hair of surpassing its all-time high reached back in January 2002. While diverging monetary policies, driven by the U.S. economy’s outperformance of other OECD economies, are fueling the greenback’s ascent, they do not entirely explain the USD’s surge.”
“The trade-weighted USD is now more than 20% higher than it was back in 2007 even though the U.S. yield advantage is similar to what it was 11 years ago. So, what else is propelling the greenback? The return of risk aversion has clearly helped the USD. But because the greenback has outperformed other “safe haven” currencies such as the yen and swiss franc this year, there must be something else at play. And here we’re thinking of speculators who have taken net long “non-commercial” positions on the USD to the highest in a year and a half.”
“While the USD is now flying high, don’t rule out a sharp correction, amplified by the reversal of those massive net long positions, should the appetite for risk make a comeback in global financial markets.”
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