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Bilal Hafeez, Research Analyst at Nomura, suggests that the factor that tends to coincide with dollar rallies is extreme investor short positioning, especially among hedge funds (or fast money).

Key Quotes

“Earlier this year, hedge funds reached their largest short dollar (or long euro) position since 2014. The dollar rally didn’t come immediately, it took a few months, but the context was set. Today, that positioning has flipped to hedge fund investors being long dollars (or short euro). This removes one support for the dollar.”

“However, the potential saving grace for the dollar on the positioning side is that real money investors are still very short dollars (or long euro).”

“These flows tend to be slower moving and more driven by longer-term fundamentals such as current accounts or valuations.”

“If these investors decide to capitulate then the dollar could get some tailwinds. However, our view is that the fundamental picture for the dollar is mixed at best, so we don’t expect such a turnaround.”

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