ON A GENTLE MILLPOND
CURRENTS STIR BELOW It is interesting how the non-commercial (known as speculative) long euro/short dollar position has been ‘pressed’ again this year.
However, although it is easy to see on the chart the massive increase in year, more often than not, in fact quite regularly, occurs at the beginning of February. If a good trend has developed during the previous year, in any asset class, it is astonishing how ‘everyone’ tries to take positions similarly, with the momentum, in the New Year. Evidently, what is good for 2017 is good for 2018... and then come February and it often reverses.
As you can see in the chart above, where the orange line is the euro and the white line is the speculative dollar short/euro long position, the correlation is undeniable. The long euro position has been ‘pressed’ again, early this year and now dollar speculators sit on shorts at record high levels, which in itself makes it dangerous.
Obviously, anyone betting against the dollar, in a geared carry trade, is 2.145 % against two year German bonds of 0.56 % but with such voracious desire to short the dollar.
long euros, has increased as US bonds have also slid dramatically on part been caused by the soft dollar, therefore, as the dollar goes down,
Chart 1
can calculate that out of a 2.7% yield on 10 year September last year, this amount was 1.8% of the 2.3% total yield. In 2016, when the 10 year bond was
Being short the dollar or short US treasury bonds has in essence become the same trade. As well as better economic growth outlook, which in itself also causes a soft dollar. Emerging markets have soared, in both bonds and equities and for US investors to buy EM, dollars have been sold and transferred into the currencies of those much riskier global trades. This buying of EM assets has added to the global growth perception, commodities and mining shares have also risen following the weak dollars lead. Good bonds. The virtuous circle is set.
The problem with virtuous circles is that eventually the positioning in them becomes just too large. more leverage is overlaid. The last people into the trade (normally speculative punters – as we see in the futures positioning charts) take on borrowing and gearing levels that only greed would dictate because of the leverage, the ‘late to the trade’ punters have to unwind. That unwind becomes very painful and causes more unwinding. The virtuous circle thus turns into a vicious circle.
No-one now mentions the end of QE globally and the introduction of QT; how weird to ignore the end of any consequential move is purely fundamentally and economically based. It is bordering on amusing.
Source: Bloomberg
bond markets has started to hit oversold levels. We are back to levels that have been supportive for many years. 2.75% yield, in the modern world, is seen as
10 | ADMISI - The Ghost In The Machine | January/February 2018
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