Looking for more excuses to be short the dollar on a “tactical” basis?
Probably not. After all, the list is already pretty long and while I assume you could point to Wall Street consensus (which is generally bearish on the greenback) as the ultimate contrarian indicator, the case for dollar weakness is pretty strong in the near-term.
For one thing, the Fed has decisively pivoted dovish and it seems likely that March and June are now off the table barring another 10% rally in the S&P and an accompanying sharp loosening of financial conditions.
In addition to the Fed, the incoming data suggests the US economy is decelerating, although that assessment depends on how inclined you are to assume that December payrolls was simply the last gasp of a dying expansion.
Meanwhile, the situation in D.C. is an unmitigated dumpster fire befitting of America’s new reality which finds the world’s most successful democracy desperately trying to avoid taking even one more step down the road to banana republic status, lest the MSCI EM index should include “United States” at some point in the not-so-distant future.
If all of that isn’t enough for you, Jeff Gundlach is generally bearish on the greenback and remember, anything Jeff says is by definition true – that’s why his Twitter handle is @TruthGundlach.
The above is obviously dripping with sarcasm, but the dollar is in fact beset with all of those concerns to a greater or lesser degree, which accounts for the four-week losing streak (and counting with Monday’s soft session).
Well, Goldman has another reason to be tactically short: robots or, more specifically, CTAs.
After noting that the CFTC report has been MIA thanks to Donald Trump’s
“greatest” shutdown, Goldman endeavors to “get a sense of how shorter-term investors, such as systematic trading funds (e.g., CTAs), might be positioned by assessing the trade signals from simple momentum strategies and forecasting the latest IMM positions based on their typical drivers.”
That’s a noble quest and the results are interesting – I mean, not really, but it’ll work.
Goldman uses “a simple momentum strategy” as a proxy, which is sure to drive quant managers crazy, and discovers that “CTAs using longer-term strategies could still be buying USD—except against JPY—while those using a shorter-term strategy might already be selling USD”. As far as strats that go by breaks of moving averages, Goldman says they have “on net, already started to point to USD selling, particularly versus JPY and EUR.”
After elaborating a bit on those points, the bank then attempts to project what the CFTC report would look like were it available. “More rigorously, we can estimate where investor positions might be today by forecasting the CFTC’s weekly futures traders data based on their typical drivers”, Goldman writes, adding that based on a regression, they “find that USD positioning has likely turned less bullish USD since mid-December, with leveraged funds—the category that includes CTAs—mostly buying JPY, EUR, and GBP.”
Below find the visual, which just shows that on net, positioning is likely still stretched to the long side.
The bank’s conclusion:
We see sufficient signs that systematic investors still hold a long USD bias [and] we view this as a potential source of additional downside momentum and yet another reason to be tactically short DXY at these levels.
Now if only Trump would let the government open, we could all find out how accurate all of the above actually is.