(Bloomberg) — Hedge funds have capitulated on their short-dollar bets after surging Treasury yields upended a favorite global macro strategy.
Leveraged funds flipped to become net buyers of the world’s reserve currency during the week to March 16 — a tumultuous period that saw Treasury yields breaching key levels on feverish inflation fears. They added bearish bets on the yen and euro, and switched from bullish positions on the New Zealand dollar, data from Commodity Futures Trading Commission show.
The great unwind may just be gaining traction, some strategists said.
“It is the bond market that has been driving the U.S. dollar in the past couple of months, and it appears to be intensifying,” said Alvin T. Tan, head of Asia foreign-exchange strategy at RBC Capital Markets. “I would expect further short-covering versus the U.S. dollar.”
An intensifying debate over the pace of inflation gains has split investors, with some seeing Treasury yields soaring to 2% as a global recovery takeoff with vaccine rollouts and stimulus spending. That in turn is trouncing one of Wall Street’s most popular macro calls of 2021.
Holding dollar shorts would have served traders a 1.8% loss this year after being a profitable strategy in eight of the nine months through to December, Bloomberg data shows.
Dollar buying by hedge funds rose to the most since August 2014, according to an analysis by Australia & New Zealand Banking Group Ltd. strategists including Khoon Goh. “With U.S. 10-year bond yields poised to rise further, expect financial market volatility to increase,” he said.
Hedge funds’ long dollar positions climbed to 2,414 contracts, compared with shorts of 62,781 a week earlier, according to CFTC data on seven major currencies aggregated by Bloomberg. It is the first time they are bullish on the greenback since November.
The Bloomberg Dollar Spot Index rose 0.1% on Monday after the Turkish lira’s plunge spurred demand for haven assets.
“U.S. Treasury yields and virus dynamics will probably determine where the leverage community will land,” said Rodrigo Catril, currency strategist at National Australia Bank Ltd. in Sydney. While the pound and commodity-linked currencies have risen against the dollar this year, “any question marks on vaccine supplies or commodity weakness will likely see these pairs come under pressure.”
(Updates with analyst comments in seventh paragraph)
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