US Dollar: Long positioning faces reality check – DBS

DBS Group Research economist Philip Wee warns that speculative long positions in the US Dollar (USD) look vulnerable after June US CPI surprised on the downside. He highlights that CFTC data show USD longs at their highest since 2015, while futures have sharply reduced the implied probability of a September Federal Reserve (Fed) rate hike. Wee underscores Fed Chair Kevin Warsh’s hawkish rhetoric but notes the lack of clear policy guidance.

Speculative USD longs look stretched

"We are wary of the long USD bets built on a hawkish Fed foundation. According to the CFTC Commitment of Traders Report, gross non-commercial USD long positions across IMM futures reached their highest since 2015."

"Following the surprisingly cool June US CPI report, Fed Chair Kevin Warsh intends to have an intense and honest debate with Fed members at the July 28-29 FOMC meeting about forward guidance and about acknowledging the limits of forecasting abilities with economic models or single data points."

"The futures market reduced the probability of a Fed hike in September to 48% from 64%. Fed Chairman Kevin Warsh declared before the House Financial Services Committee a lack of tolerance for elevated inflation but did not provide any guidance on how to achieve this."

"His aggressive rhetoric decoupled from the cooling in the June CPI inflation to 3.5% YoY (-0.4% MoM) from 4.2% YoY (0.5% MoM) in May and core inflation to 2.6% YoY (0% MoM) from 2.9% YoY (0.2% MoM). Warsh also told lawmakers that he does not have a preferred inflation metric and has one of his appointed task forces seek an underlying inflation rate that strips temporary geopolitical distortions and commodity spikes."