Wealth

Shorting the U.S. Dollar: The Next Crowded Trade?

  The game about the 10-year U.S. Treasury bond has become clear after a series of recent events. Although the trading position is still bearish on the 10-year U.S. bond, U.S. debt has experienced a sharp short squeeze under the protection of the Federal Reserve and the U.S. Treasury Department. From a certain perspective, the effectiveness of policies is still what officials value most. In the short term, it is difficult for the market to agree with the relatively conservative bond issuance plan of the U.S. Treasury Department, but it is difficult for the naked short strategy to work again in the short term.
  At the same time, it can also be seen that in the futures market, speculative short U.S. bond positions are still at a high level. This is because whether you are long or short in risky assets (such as stocks), you can do so through short positions in bonds. form a hedge. For stock longs, even if shorting bonds directly does not necessarily result in direct gains, from a portfolio management perspective, shorting bond positions can provide certain protection for stock longs – the market turmoil in the past period shows that Nothing is impossible. If the bond market sells indiscriminately again, stocks will surely suffer. At this time, bond shorts can benefit and form a hedge against stock assets.
  Even from the perspective of stock shorts, as the macro outlook begins to weaken marginally, there is still uncertainty in the profit performance of the stock market. At this time, stock shorts can also be hedged through bond shorts. That is to say, if bond shorts lose money If you have money, then the short position of the stock can make profits.
  The fact that speculative positions have been short on U.S. Treasuries has been established for a long time, indicating that the related hedging strategies have always been logical. However, the biggest buyers in the bond market are not speculative positions like hedge funds, but the buy side represented by real money. For them, as long as the top range of interest rates is roughly determined, then buying is just a matter of timing. . Judging from the current situation, the top interest rate of the 10-year U.S. Treasury bond is basically determined after policy intervention, so the buying of real money will suppress the rapid rise in its interest rate.
  For different investors, the logic of shorting and longing U.S. Treasuries is largely valid. After a little extrapolation, the logic of long and short U.S. stocks is also self-consistent at the moment. For example, if the U.S. economy is also slowing down, short sellers see profit pressure, while long sellers see the power on the denominator side.
  Breaking this balance requires more surprises. For example, the market is convinced that the Federal Reserve will enter the interest rate cut channel, or inflation is so high that the market once again ignites expectations of raising interest rates. Otherwise, the market will most likely struggle around its current position. If you break away from the complexity of the market game, you will find that shorting the U.S. dollar has the clearest main line of trading at the moment.
  The performance of the U.S. dollar index since 2023 has been relatively tangled, with the main trading focus switching between “recession” and “soft landing”. Although a “soft landing” is more in line with the current mainstream market view, the recent weakening of U.S. economic data has forced the market to once again pay attention to the possibility of a “recession.” From the perspective of GDPNow, after a long period of disagreement with the market, GDPnow recently pointed to a sharp slowdown in U.S. economic growth in the fourth quarter. It also rarely reconciled with market expectations, generally pointing to GDP growth in the fourth quarter. Around 1%. In other words, a growth rate exceeding 5% in the third quarter is likely to be the “peak of prosperity.”
  Compared with whether to cut interest rates, it is more certain that the momentum of the U.S. economy will weaken in at least the next two quarters. Of course, the biggest impact on the U.S. dollar index is the euro. The momentum of the European economy does not seem to be strong at the moment, which will have a marginal impact on the U.S. dollar index. form a supporting role. But it needs to be pointed out that the U.S. economy is still the most critical variable for the U.S. dollar, especially when the U.S. dollar index just shows signs of falling. In another relatively extreme scenario, if the U.S. cuts interest rates earlier, the U.S. dollar index will encounter greater selling pressure.
  Seasonality also supports the logic that the dollar is about to weaken. Judging from the performance of the past five years, the U.S. dollar index has a higher probability of weakening in November and December, and since 2018, the U.S. dollar index has fallen in December. Comparing the 10-year U.S. Treasury bond and the Nasdaq index, you will find that the 10-year U.S. bond interest rate is likely to rise in December, but the seasonal pattern of the Nasdaq index is unclear. In November 2022, the U.S. dollar index fell 5% in a single month, the largest decline in the past five years, which will naturally make the market wonder.
  Overall, based on fundamentals, sentiment, and seasonal considerations, shorting the U.S. dollar will most likely become the next crowded trade. Before “overcrowding” occurs, the U.S. dollar index will encounter significant downward pressure.
  For the RMB, an improvement in the external environment also means that the depreciation pressure it faces will be further released.

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