‘There Are Still Too Many Dollars’: Goldman

So irrespective of what happens between now and the close, the overnight action clearly indicates that the market is not prepared to buy into the Trump administration’s efforts to walk back the weak dollar rhetoric.

Everyone knows what’s going on here. “Steven Mnuchin used to run a hedge fund, so he knows how markets work [and] he’s saying on CNBC that he wasn’t trying to move the dollar on Wednesday and that his comments have been consistent, but c’mon,” Bloomberg’s Cameron Crise wrote on Friday morning, before imploring you to acknowledge the reality that “a Treasury secretary who talks about the benefits of a weak dollar is always going to be seen by the market as endorsing it.”

So the question now is this: how much further does the selloff have to go?

Obviously the answer depends in no small part on Donald Trump and how far the administration wants to push the rhetoric and as Goldman writes in a new piece, there are “still too many dollars”.

While the bank notes that CTAs and hedge funds are positioned for dollar weakness, Goldman warns that “other investors likely have scope for additional USD selling.”

Here’s a chart that shows the sensitivity of hedge fund returns to changes in the broad USD:

Ok, so they’re short (weighted average fund most short in more than six years).

But here’s weekly returns for the Morningstar World Bond Fund category compared to returns for the Bloomberg/Barclays Global Aggregate Index and regressed on the dollar, credit spreads, and duration:

The implication there is obvious. “Continued USD weakness will subtract from fund performance, possibly motivating further selling,” Goldman flatly states, before reminding you that FX reserve managers “are in a similar boat”.

So is this a one-way ticket lower? Well, no. There are all manner of catalysts that could mitigate things, but the overall trend would appear to be lower and as such, Goldman sees “downside risks” to their dollar forecasts.