King dollar delivers best hedge fund FX quarter since 2017

Hedge funds had a torrid second quarter, but their faith in the dollar paid off spectacularly.

Industrial data provider HFR’s currency index, part of the broader macro (total) index, rose 1.76% in June, the biggest monthly gain since March 2020, which carried the increase from April to June to 5.70%.

This is the best quarter since a 5.72% increase during the same period in 2017.

Or put another way, the FX strategies tracked by HFR have essentially just had their joint best quarter since the index launched in 2008. At the heart of this was the consistent and large long position of the dollar funds.

According to data from the Commodity Futures Trading Commission, hedge funds have been long dollars against a basket of G10 currencies every week for 51 weeks. The average net dollar long position in the second quarter was worth about $15 billion.

Thanks to a widely held belief that the Federal Reserve will raise US interest rates to fight inflation more than other central banks, the dollar crashed in the second quarter.

It is now at a 20-year high against the euro and a basket of major currencies, and its 6.5% rise on an index basis in April-June was its best quarter since 2016.

The latest data from the CFTC showed the funds increased their net dollar long position against G10 currencies by $2tn to $16tn in the week of July 4, simply reversing the 2tn cut. billions of dollars the previous week.

This suggests that despite the dollar’s strong gains, elevated position, and a general easing of investor expectations for the Fed’s tightening cycle, funds are confident the greenback can climb even higher.

MUFG’s Lee Hardman notes that the stronger-than-expected US jobs report for June on Friday and the latest public comments from Fed officials point to another 75 basis point rate hike later this month.

“The dollar has strongly regained its upward momentum over the past week and we expect this to continue in the near term,” Hardman wrote in a note Friday.
The relative weakness of the main counterparts of the dollar, in particular the euro, cannot however be ignored.

CFTC funds increased their net short position in euros to 16,852 contracts from 10,596 a week earlier. This is the biggest net selloff this year and marks the fourth week in a row that funds have been net short on the euro.

A short position is essentially a bet that an asset will go down, and a long position is a bet that it will go up. The funds now hold a $2.16 billion bet on the weakening euro. A month ago, they had bet 6.8 billion dollars on its reinforcement.

The reversal is chargeable.
The euro fell to a 20-year low at $1.0070 last week, near parity, on fears the energy crisis could tip the eurozone economy into recession and the European Central Bank may have struggling to sustain growth while trying to rein in record inflation. and curbing the widening of sovereign bond yield spreads.

Hardman recommends selling the Euro at $1.0160, aiming for a breakout parity at $0.9760 soon. It seems that a growing number of hedge funds would agree with this.
Source: Reuters (By Jamie McGeever Graphics by Jamie McGeever, Saikat Chatterjee, Marc Jones; Editing by Sam Holmes)