There’s plenty that could derail a December rate hike. Aside from last week’s read on consumer prices, inflation reports have mostly been tame. And a devastating hurricane season is still in full swing, although the Fed said the storms that have struck the U.S. so far would have only a near-term economic impact.
The futures market shows how deeply entrenched the market’s pessimism toward the greenback has become. Positioning by hedge funds and other large speculators toward the dollar is close to the most bearish since 2013. That’s a reversal from earlier in the year, when a survey by Bank of America Corp. found bullish dollar bets were the most crowded trade in financial markets.
Jonathan Davies, head of currency strategy in the investment solutions team at UBS Asset Management, said the market has been overly gloomy on the U.S. currency.
“The case for modest tightening is still there,” said Davies, whose firm manages about $732 billion. “That’s likely to give the dollar a little bit of a fillip” in the next six months or so, even though he sees the currency weakening longer-term.
Dollar-yen options signal the greenback may be starting to gain favor. Over the past week, nearly $13 billion more dollar calls, which give the right to buy the currency, have been bought than puts, which bestow the right to sell, Depository Trust & Clearing Corp. data show. The dollar’s one-month risk reversal against the yen, a barometer of positioning and investor sentiment, rose this week to the most bullish since June.
And on the political front, the risks may not look as crippling as before. Beyond the president’s deal-making with Democrats, Republicans lawmakers will also face pressure to deliver some form of tax cuts and infrastructure spending before elections next year, State Street’s Crownover said.
“The market’s too negative on the Trump trade,” he said. “There is a higher likelihood that we will at least get a piece of this Trump trade in, if not later this year, perhaps early 2018.”
This article was provided by Bloomberg News.