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Trader: "Dollar Bears Beware: This Is The Pain Trade Of The Year"

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Yesterday, we presented the opinion of former Lehman trader and current macro commentator, Mark Cudmore, who explained why in his view, Trump was on track to "win the currency devaluation game", something he hinted with his unprecedented tweets slamming Russia and China for currency manipulation.

24 hours later, another FX and macro analyst, Bloomberg's Vassilis Karamanlis, says "not so fast", and warns dollar bears that Trump tweets "may not be enough", noting that as a result of Trump's constant frustration of dollar longs, "be it with verbal intervention toward a weaker currency, personnel changes or trade protectionism" any rebounds in the U.S. currency this year have been short-lived, leading to "a massive build in short-dollar positions. Hedge funds and other large speculators haven’t been more bearish on the greenback in more than five years."

But to Karamanlis, the real risk lies not with Trump but with the Fed: "those hoping for an assist from monetary policy are likely to be sorely disappointed" the FX strategist notes and adds that "The Fed isn’t just retaining its bullish stance, it’s looking for a more aggressive rate-hike trajectory than the market anticipates. With almost half of Fed policy makers projecting at least four interest rate increases for 2018, upside risks prevail."

He explains his full reasoning why it may be time for the dollar bulls to smile, in his latest macro view note below:

Dollar Bears Beware, Trump Tweets May Not Be Enough: Macro View

The entrenched bearish dollar view has all the ingredients to become the pain-trade of the year. It has become super crowded based on occasional utterances from the White House while ignoring a fundamental shift at the Fed.

The Bloomberg Dollar Spot Index is hovering near a three-year low as uncertainties surrounding the Trump administration weigh on investor confidence.

Be it verbal intervention toward a weaker currency, personnel changes or trade protectionism, the U.S. President has had a way of frustrating dollar longs.

As a result, any rebounds in the U.S. currency this year have been short- lived. That’s led to a massive build in short-dollar positions. Hedge funds and other large speculators haven’t been more bearish on the greenback in more than five years, CFTC data show.

With less room for additional short exposure, dollar bears are going to need something more than the short-term turbulence generated by Trump. Those hoping for an assist from monetary policy are likely to be sorely disappointed.

The Fed isn’t just retaining its bullish stance, it’s looking for a more aggressive rate-hike trajectory than the market anticipates. With almost half of Fed policy makers projecting at least four interest rate increases for 2018, upside risks prevail.

Those risks may become more pronounced should the U.S. Senate confirm Richard Clarida as vice chairman. Clarida, no stranger to the notion of a total of four hikes this year, may spark another round of speculation on whether the FOMC could include a price-level target in its policy framework.

Soon-to-be New York Fed President John Williams also advocates such a shift, which Clarida said, in a Pimco commentary back in 2014, would -- in theory -- result in higher yields on longer-duration bonds.

Given the dollar has been feeling the pressure of a flatter curve since late 2016, the all-new Fed may bring an end to fears that the curve’s shape portends a U.S. recession.

After all, the composition of voting members this year has shifted from 2017’s dovish roster. Dollar pricing hasn’t reflected that.

Even if Trump shifts away from weak-dollar rhetoric and the market catches up with the Fed’s dot plot, the dollar may struggle to gain the 6% needed to retest October’s highs. But that doesn’t mean we’ll see a slide to fresh, sustainable year-to-date lows.

There’s too much focus on Trump and growth in the rest of the world, and not enough on the Fed. The direction of the dollar’s next move may well be determined by actual U.S. data, rather than investors’ interpretations of reactionary early-morning tweets.

 

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