While it is unlikely that investor positioning triggered the US dollar weakness, it is possible that it has led to some capitulation in the move. Key technical levels broke this week amid high volumes, resulting in the EUR/USD moving from 1.20 at year end to 1.22 as at 17 January—a level not seen in over three years. As currency investors, particularly fast money hedge funds, stop out of their long US dollar positions, the subsequent selling has put further downside pressure on the currency.
What does this mean for fixed income investors?
Going into 2018, our view was that the US dollar would weaken vs. the euro over the course of the year, but appreciate in the near term due to its “high yield” status compared to other developed market currencies. However, the US dollar has been astoundingly divorced from rates spreads. As we struggle to identify a single justification for the recent US dollar weakness, it seems that it may be a matter of many small moving parts accounting for the currency move. We maintain our view of a higher EUR/USD by year end, though we recognise that much of this move has happened more quickly than we anticipated. As such, we have a neutral EUR/USD position and instead are expressing our positive euro view by going long euro-related currencies vs. short exposure to commodity-bloc currencies, such as the New Zealand dollar.
About the Bond Bulletin
Each week J.P. Morgan Asset Management’s Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.
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