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How hedge funds view the fate of king dollar

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How hedge funds view the fate of king dollar
© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

By Nell Mackenzie and Carolina Mandl

LONDON/NEW YORK (Reuters) – After making hay when a summer bond rout propelled the U.S. dollar to 10-month highs, hedge funds are now pondering what lies ahead for the greenback.

The dollar, down 3.5% in November against a basket of other major currencies, is set for its worst monthly performance in a year as expectations of interest-rate cuts next year grow, toppling Treasury yields from multi-year highs.

Five funds shared their views on the fate of the dollar. This does not represent recommendations or trading positions, which some hedge funds cannot reveal for regulatory reasons.

1/ AQR CAPITAL MANAGEMENT

* Systematic asset manager

* Size: $95 billion assets under management (AUM)

* Founded in 1998

* Key trade: Long dollar, short Swiss franc

Managing director Jonathan Fader believes that an end to U.S. rate hikes does not necessarily imply dollar weakness.

Over the last 40 years, the dollar has tended to average steady or a bit stronger in the months following a final hike, says Fader, who is “constructive” on the currency.

“In particular, growth trends in the U.S. look notably stronger than in most other major economies around the world,” he said.

Fader believes the best way to capitalise on ongoing dollar strength would be to buy the greenback against currencies exposed to negative price trends, weaker economic fundamentals and dovish monetary policy, such as the Swiss franc.

The Swiss franc is up around 5% against the dollar so far this year.

2/ FLORIN COURT CAPITAL

* Diversified systematic asset manager

* Size: $1.8 billion AUM

* Founded in 2016

* Key trade: Long Latin American emerging markets currencies/short dollar

Doug Greenig, Florin Court’s chief investment and executive officer, reckons the dollar will slowly decline as geopolitical tensions disperse power to different parts of the world.

He expects the U.S. economy to slow sharply which, alongside falling inflation, will likely hurt the dollar against some emerging market currencies.

“The year-on-year reduction in the U.S. broad money supply is huge. It’s even bigger when you factor in the inflation-adjusted money supply,” said Greenig, adding this would make it “very hard” to sustain growth. “This is the punch draining out of the punch bowl.”

Greenig noted that because many emerging market countries raised rates earlier and more aggressively than advanced economies, bond yields in countries such as Brazil, Colombia, Hungary and Poland look attractive.

3/ NWI MANAGEMENT LP * Global macro hedge fund * Size: $2.2 billion AUM * Founded in 1999 * Key trade: short offshore Chinese Yuan against a trade-weighted CFETS (China Foreign Exchange Trade System) basket of currencies

Tara Hariharan, managing director of global macro research at NWI, said the hedge fund is structuring its currency bets to limit the effect of swings in the dollar, as the resilience of the U.S. economy has made it difficult to call a peak for the greenback.

One of the trades she recommends involves China. Hariharan said yuan depreciation risks loom as China’s capital outflows rise, multinationals repatriate more earnings and the economy slows further.

“The yuan may be seasonally supported by Chinese New Year-related demand until late January but then may turn lower,” she said.

NWI also does not rule out a forced weakening of the yuan to improve China’s export competitiveness.

4/ GARDE ASSET

* Brazilian hedge fund, with global macro strategy

* Size: $300 million AUM

* Founded in 2013

* Key trade: Long Mexican peso

Garde CEO Carlos Calabresi favours Mexico’s currency because interest rates have been at an historic high of 11.25% since March and its balance of payments is in good shape.

He also believes the country will receive huge foreign investment from so-called “nearshoring” as manufacturing capacity is moved closer to the U.S. market from, for example, Asia.

These trends are likely to lead to a strengthening of the Mexican peso, which is up roughly 13% against the dollar this year.

5/ CIBC ASSET MANAGEMENT

* Canadian asset manager, with an active currency strategy

* Size: $145 billion AUM

* Founded more than 50 years ago

* Key trade: Long Brazilian real

Michael Sager, CIBC Asset Management’s head of multi-asset and currency management, believes the Brazilian real is likely to strengthen in the short term given a double-digit benchmark interest rate, currently 12.25%, that attracts foreign capital.

The Brazilian real, trading at 4.8908 per dollar, is up roughly 8% so far this year against the dollar.

Inflation, at around 5%, is also under control, as the Brazilian central bank was one of the first monetary authorities to begin hiking rates, said Sager.

Additionally, Latin America’s largest economy has strong exports and low debt levels compared to other major economies.

“If you put all of those pieces together, to us this is what a strong fundamental country and currency should look like,” he said.

Forex

Dollar firms, euro slips ahead of key inflation data

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Dollar firms, euro slips ahead of key inflation data
© Reuters

Investing.com – The U.S. dollar firmed in early European trade Wednesday, shrugging off signs of U.S. economic weakness ahead of the release of this week’s key inflation data as traders look for clues as to when the Federal Reserve will start cutting interest rates.

At 04:00 ET (09:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher at 104.080. 

U.S. inflation to prove sticky?

Data released on Tuesday showed that orders for U.S. fell a hefty 6.1% last month, while the Conference Board’s was revised lower for January and declined further in February. 

However, these signs of economic weakness have had little impact on the U.S. currency with all eyes on the , the Fed’s favorite inflation gauge, due on Thursday. 

Economists are expecting a 0.4% increase for January after 0.2% in the previous month. A stickier-than-expected reading could prompt the Fed to delay rate cuts further.

“We remain of the view that evidence of resilient inflation in the Fed’s preferred measure of inflation will offer more support to the dollar into the end of the week,” said analysts at ING, in a note.

Markets have largely priced out a rate cut at both the Fed’s March and May meeting, and the chance of a cut in June is seen as largely 50:50.

Before the PCE data, a second reading on fourth-quarter is due later on Wednesday, while there are more Fed officials due to speak, including , and .

Euro edges lower ahead of eurozone CPI

In Europe, traded 0.2% lower at 1.0818, with Europe also looking forward to its own slew of inflation reports, with Germany, France and Spain scheduled to release price data on Thursday ahead of the on Friday.

Economists are expecting an annual reading of 2.5% for February, dropping from 2.8% in January.

Still, the dollar trade continues to dominate, and this inflation release will have to provide a major surprise to influence the pair substantially.

“EUR/USD continues to follow the dollar dynamics without showing any material impact from eurozone-specific drivers. The pair looks likely to test 1.0800 in the coming days, in our view,” ING added. 

traded 0.4% lower at 1.2635, with sterling hit by a stronger dollar and after recent data showed U.K. grocery prices rising at their lowest rate since March 2022.

Kiwi dollar slumps after RBNZ meeting

In Asia, fell 1.1% to 0.6103, near a two-week low, after the held interest rates steady at 5.5%, but flagged more progress in inflation moving towards its 1% to 3% annual target. 

While the bank still signaled that it will keep interest rates higher for longer in the near-term, its comments saw traders largely price out expectations of any more rate hikes.

traded 0.2% higher to 150.80, with the yen weakening further beyond the 150 level, although steeper losses were limited by the prospect of early interest rate hikes and government intervention.

traded largely unchanged at 7.1993, as traders awaited the release of key for February, due this Friday. 

 

 

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Forex

Dollar slips vs yen after Japan inflation data, US durable goods

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Dollar slips vs yen after Japan inflation data, US durable goods
© Reuters. FILE PHOTO: U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Caroline Valetkevitch

NEW YORK (Reuters) -The dollar eased against the Japanese yen on Tuesday after data showed Japan’s core consumer inflation exceeded forecasts while U.S. durable goods orders fell more than expected in January.

Overnight data out of Japan kept alive some expectations that the Bank of Japan might end negative interest rates by April.

In the U.S., the Commerce Department’s Census Bureau said orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, tumbled 6.1% last month, exceeding the 4.5% decline forecast by economists polled by Reuters.

Markets have recently pulled back expectations on the timing and size of Federal Reserve rate cuts this year as the U.S. economy remains strong and inflation pressures stubborn.

Against the yen, the dollar dipped 0.1% to 150.56, while the , which measures the currency against a basket of peers, was last up 0.08% at 103.86.

“Inflation numbers have been drifting a bit lower in Japan over the past few months, but today’s numbers did suggest inflation is sticky even in Japan,” said Shaun Osborne, chief currency strategist at Scotiabank in Toronto.

“It probably does mean we’ll get a mild series of rate increases in Japan in the next few months.”

hit a two-year high on signs large players were buying the cryptocurrency.

Bitcoin was last up 5.22% at $57,513, while ether rose 2.26% at $3,258.

In other U.S. economic news, the consumer confidence index slipped to 106.7 this month – short of forecasts – from a downwardly revised 110.9 in January.

The U.S. core personal consumption expenditures (PCE) price index, due on Thursday, is expected to be one of the more important reports of the week for the market. Forecasts are for a rise of 0.4%.

“We’re waiting for the PCE data to give us a stronger sense of direction perhaps,” Osborne said. “I think we’re prepped for slightly stronger numbers; it probably at this point would have to be a big upside surprise to really get the dollar strengthening.”

The euro was last down 0.1% versus the greenback. It has been rising since mid-February, when it hit its lowest since Nov. 14.

Analysts said the single currency strengthened as markets scaled back bets on future European Central Bank rate cuts to 90 bps by year-end, amid encouraging signals from the economy, which supports expectations for a pick-up in growth in the second half of 2024.

German states, France and Spain will release inflation data on Thursday ahead of the euro area’s figures due on Friday.

ECB officials have sounded more cautious about a quick easing of monetary policy, with President Christine Lagarde saying wage growth remains robust, while ECB dove Yannis Stournaras ruled out a rate cut before June.

The dollar strengthened 0.06% at 7.214 versus the offshore . The People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1057 per dollar.

The weakened 0.06% versus the greenback at $0.617, with traders gearing up for what could turn out to be a significant policy meeting by the Reserve Bank of New Zealand (RBNZ) on Wednesday.

Markets are pricing in a one-in-three chance the RBNZ will raise its 5.5% official cash rate to combat stubborn inflation.

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Dollar firmer before key inflation data, kiwi sinks as RBNZ holds rates

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Dollar firmer before key inflation data, kiwi sinks as RBNZ holds rates
© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

By Samuel Indyk and Brigid Riley

LONDON (Reuters) -The dollar firmed up on Wednesday as markets awaited a raft of global inflation data for clues on when central banks may start easing policy, while the New Zealand dollar tumbled after its central bank trimmed its forecast for a peak in rates.

The was also hanging at its lowest in over a week after inflation data came in softer than expected, reinforcing expectations that domestic interest rates are unlikely to increase further.

The data calendar looks light on Wednesday so analysts said markets were likely to focus on consumer inflation data from the U.S., Germany, France and Spain on Thursday ahead of euro area figures due on Friday.

“There’s more chance of disinflation ongoing in the euro area, which perhaps could open the door for an earlier cut from the European Central Bank,” said Danske Bank FX and rates strategist Mohamad Al-Saraf.

“We think if inflation is stickier in the U.S. than it is in the euro area then the dollar has to be strong.”

Higher-than-forecast inflation in the U.S. has prompted markets to trim bets on the number of rate cuts expected from the Federal Reserve this year, while the chance of a cut in June now stands at around 60%. At the start of the year, markets were almost fully pricing a rate cut in March.

That repricing has pushed the U.S. currency higher in 2024, including against the euro. The single currency was last down 0.3% against the dollar at $1.0815.

The , which measures the currency against six others including the euro, was last up 0.2% at 104.07, having risen 2.7% year-to-date.

With market expectations more closely aligned with the Fed’s latest projections and comments, traders would only respond if they see a trend break in tier one data, especially anything “hinting at growth weakness,” said Charu Chanana, head of currency strategy at Saxo.

New Zealand’s central bank held the cash rate steady at 5.5%, catching markets by surprise as policymakers said the risks to the inflation outlook have become more balanced.

The RBNZ also trimmed its forecast cash rate peak to 5.6% from a previous projection of 5.7%.

“With a cash rate at 5.5%, the 10 basis points of wriggle room is simply there to remind us that they’ll hike if they need to but the bias is that they probably won’t,” said Matt Simpson, senior market analyst at City Index.

The slid over 1% to its lowest since Feb. 16 at $0.6093 in response.

The Australian dollar also fell after data showed inflation at an annual pace of 3.4% in January, unchanged from December and under market forecasts of 3.6%.

Although inflation remains above the Reserve Bank of Australia’s (RBA) 2-3% target, “it is close enough to expect the RBA to hold rates steady,” said Simpson.

The Aussie was last down 0.6% at $0.6502.

Elsewhere, sterling weakened to $1.2657, down 0.2%, while the yen slipped 0.1% versus the greenback to 150.595.

“We’ve seen in the past when dollar-yen trades above 150 that authorities start to give increased attention to the currency,” Danske Bank’s Al-Saraf said.

“But I would say right now there’s probably not intervention risk unless we see a sharp move in the yen again.”

In cryptocurrencies, bitcoin was last up over 4% at $59,200, extending to its highest level since November 2021.

Ether rose 2% to $3,320.

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