Image © Adobe Images
"The dollar is riding a wave of positioning that history suggests cannot hold," says Karl Schamotta, Chief Market Strategist at Corpay.
In a quarterly forecast note, he explains that the trade-weighted dollar snapped a long bearish trend in March as traders sought refuge in the world's deepest and most insulated capital markets.
Options positioning has followed: one-month risk reversals on the dollar index have surged, surpassing the moves seen after both the ‘Trump Bump’ and ‘Liberation Day’.
As a result, "positioning on the dollar has turned overwhelmingly bullish. This looks overdone, and could unwind if stress levels fall," says Karl Schamotta, analyst at Corpay.
Recent G10 positioning data from Deutsche Bank shows the dollar is by far the biggest 'long', with the Swiss franc the biggest short.
Deutsche's positioning signals are derived by aggregating individual sub-indicators based on internal flows (CORAX), trade and order flows from inter-dealer platforms, option volumes from DTCC and IMM positioning.
"That crowding is a vulnerability. A mean-reversion process is likely to play out as the conflict stabilises—and if it does, the dollar faces structural headwinds that the rally has obscured," says Schamotta.
He explains the forces behind a decade of American exceptionalism (outsized fiscal stimulus, a favourable regulatory environment, and concentrated equity market leadership) are losing traction independently of the war.
Brent Donelly, a strategist at Spectra Markets, says in a note out today that the market is extremely long USD and yet people are mostly bearish USD.
"This mismatch of positions and hedges vs. actual macro views is glaring and could resolve in a massive forced removal of hedges accelerated by FOMO USD shorts and CTA dollar selling," he warns.