Dollar Rout Built on Sand for Investors in It for Long Haul

(Bloomberg) -- Even as the dollar heads for a quarterly decline, long-term investors seem skeptical of the sell-off.

They pared their bullish bets on the greenback, but they refrained from switching to all-out bears, according to Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho Bank. It’s an entirely different matter for short-term investors, who drove down bets for dollar strength materially in May, said Adrian Boehler, global head foreign-exchange sales at UBS Group AG.

It’s a manifestation of the divide in markets today, leaving some guessing if the 2.5% decline in the Bloomberg Dollar Spot Index so far this quarter is a short-term sell-off, or a more definitive shift toward optimism that the pandemic-hit world economy is due for recovery.

“I don’t believe many investors have called the dollar-weakening trade right,” said UBS’s Boehler. “Longer-term players are still overweight dollars and haven’t participated in the rally in risk and associated decline in the dollar.” This was evident from the fact that asset managers and hedge funds contributed less in May “to volumes from UBS’s franchise than historical averages,” he added.

While economic data across the globe may be bottoming out, cracks are already beginning to show in investor optimism. The recent civil unrest in the U.S. and political tussles on trade between China and western economies have clouded the outlook. Also, a second wave of coronavirus cases in America is raising concern after new infections pushed the overall count past 2 million.

Currency markets could see another swing in favor of havens such as the dollar and the yen in the coming months, given the risks of a second virus wave and credit-rating downgrades amid the global economic slump, Jane Foley, head of foreign-exchange strategy at Rabobank, said Thursday in an interview with Bloomberg Television’s Francine Lacqua.

‘Built on Sand’

The risk-asset rally that diverted demand away from the dollar is “built on sand” as it isn’t based on any long-term conviction in a global economic rebound, according to French asset manager Carmignac Gestion SA.

“The nature of this rally is very unusual -- it takes place while investor sentiment remains quite depressed,” said Didier Saint-Georges, member of the strategic investment committee at Carmignac. “For lack of visibility into next year, investors have shortened their investment horizon. So, this rotation is built on sand, but it can probably last as long as this optimism is not shattered by reality.”

The lack of investor conviction is all the more apparent in the dollar’s moves this week, with the Bloomberg Dollar Spot Index falling and rising on alternate days. Despite the recent slump in the U.S. currency, overall market positioning still remains in favor of a stronger greenback, according to the latest data from the Commodity Futures Trading Commission.

“With so many economic fundamentals staring you in the face, a full-on risk rally culminating in fresh stock markets highs seems off the table,” Mizuho’s Jones said. Longer-term investors have “only cut dollar longs rather than actively move into shorts,” he said.

Both Jones and UBS’s Boehler said this could mean that if the threats to the global economy did indeed dissipate, positioning could support a further decline in the dollar.

“What we can say with confidence at this stage is that if this downward dollar trend becomes more entrenched, then current positioning is certainly no impediment to those moves accelerating,” Boehler said.

©2020 Bloomberg L.P.