USD: Positioning highlights reversal risk in near-term - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has weakened modestly in the Asian trading session which has lifted EUR/USD back above the 1.0600-level.

Key Quotes

“It has likely been driven by some lightening of elevated long US dollar positions ahead of uncertainty related to President elect Trump’s press conference scheduled for tomorrow and his inauguration on the 20th January which represent the next two key event risks. It would be his first press conference since the 27th July. He has described it only as a “general news conference”. The Senate confirmation hearings for President elect Trump’s nominees also kick off this week which could provide further insight into the outlook for policy.”

“The recent pullback for US yields has created a less favourable environment of the US dollar in the near-term. According to the latest report from the Commodity Futures Trading Commission, speculative net short positions in the 10-year Treasury futures contract reached a record high last week further highlighting the reversal risk for Trump reflation trades in the near-term.”

“However, the fundamental case for a stronger US dollar remains well supported beyond the near-term. Last week’s solid payrolls report which revealed a further tightening in labour market conditions has reinforced confidence amongst Fed officials that the US economy is closer to meeting its dual objectives of full employment and price stability which warrants a faster pace of monetary tightening in the coming years.”

“Boston Fed President Rosengren stated yesterday that a “somewhat more regular” pace of rate hikes is warranted this year which he expects to be steeper than what financial markets are currently projecting. Even the more dovish Atlanta Fed President Lockhart has acknowledged that there is scenario in which he could envision the Fed raising rates on three occasions this year. As result, we remain inclined to view any weakness for the US dollar in the near-term as likely to prove temporary.”