Dollar outlook powers rare gap between positioning surveys

By Saikat Chatterjee and Elizabeth Howcroft

LONDON (Reuters) - A rare gap has opened up between a widely tracked positioning gauge and investor surveys collated by the world's top banks in the global $6.6 trillion per day foreign exchange market.

Leveraged investors, including some hedge funds, are pushing for a weaker U.S. dollar, according to weekly futures data, while institutional investors are betting on more dollar gains, suggesting that dollar strength is unlikely to fade soon.

With currency markets highly fragmented and spread across multiple time zones, market watchers usually rely on the weekly data from the Commodity Futures Trading Commission to get an idea on how investors are positioned in FX markets.

The latest data show investors held a net $9.1 billion negative bet on the dollar in the week ending May. 5, making it the eighth consecutive week of short dollar bets. But over that period, the dollar has gained nearly 6% against a basket of other currencies.

"My impression is this positioning data is not totally indicative and it has to be taken with more than a pinch of salt," said Francesco Pesole, a strategist at ING.

Hedge fund manager Stephen Jen of Eurizon SLJ Capital said the CFTC data accounts for a tiny slice of FX trading and is dominated by commodity-trading advisors, who are highly leveraged and short term in nature.

Wider positioning data from some of the world's biggest banks, including Morgan Stanley, BNP Paribas, RBC and Citibank, that cover a bigger set of flows, including trades on their own platforms, show investors have ramped up their long dollar bets in recent days.

1/PERFORMANCE

A negative dollar view, particularly in the second half of 2020, is premised on the argument that a broader global economic recovery would encourage investors to invest dollar liquidity in relatively higher-yielding and faster-growing economies.

That view hasn't materialised yet, with some currencies which are highly geared with the global economy trading at recent lows and roughly down 25% so far this year. Only the perceived safe-haven Japanese yen is up versus the dollar.

Graphic: Dollar Performance - https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdwarzvo/Dollar%20Performance.JPG

2/ POSITIONS

Weekly positioning data from CFTC show a slight reduction in short dollar bets in the latest week, but they remain near their highest levels in two years.

Graphic: CFTC Dollar positions - https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgnzqxvq/CFTC%20Dollar%20positions.JPG

3/DATA

Data across some bank platforms such as RBC, which take into account trades in the broader market, show long dollar positions remain 30% larger than what CFTC data shows. Similar data from Citi's trading platforms showed four-week flow trends on emerging-market currencies versus the dollar remained firmly in the greenback's favour among institutional investors.

Graphic: RBC Data - https://fingfx.thomsonreuters.com/gfx/mkt/xegvbkqzdpq/RBC%20Data.JPG

4/ OUTLOOK

On Saxo bank's trading platforms, investors remain bullish on the dollar versus the Swiss franc, pound and the euro at a time when U.S. Treasury yields dropped, reducing the dollar's interest rate advantage over other currencies.

Stefanie Holtze-Jen, chief currency strategist at DWS Group, who is bullish on the dollar, said the focus of the policy response between the United States and Europe has been different.

"In the former, it has been to get economic growth as quickly as possible, while Europe is prepared to forgo growth to alleviate the healthcare crisis."

Graphic: Citi - https://fingfx.thomsonreuters.com/gfx/mkt/xklvykbxavg/Citi.JPG

Graphic: MSP - https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkrloovm/MSP.JPG

(Reporting by Elizabeth Howcroft and Saikat Chatterjee; editing by Larry King)