Head of Commodity Strategy
Summary: Speculators cut bullish dollar bets against ten IMM currency futures by the most in eight years during the week to March 10. Collapsing US interest rates and yields helped drive unwinding of leveraged and carry positions, especially against the euro and Japanese yen.
Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.
Speculators cut bullish dollar bets by the most in eight years during the week to March 10. A surge in the probability of another near-term Fed rate cut helped sparked the biggest drop in Libor since 2008. The resulting narrowing of interest rate spreads to other major currencies drove an unwinding of leveraged and carry positions. The JPY meanwhile attracted aggressive short-covering as USDJPY broke below key support. The gross long against ten IMM currency futures and the Dollar Index was cut by 90% to just $1.7 billion, a 21 months low.
The Mexican peso overtook the dollar as the most favored long. This despite falling by 7.4% during a week where many EM currencies saw heavy selling. Commodity dependent currencies remained under pressure, not least the Canadian dollar which turned back to a net short as crude oil got slammed.
The dramatic slump in the dollar long was led by euro and Japanese yen buying. The euro net-short was cut by 85% ($10.5 billion equivalent) to the least since October 2018. The Japanese yen turned net long for the first time since October following $6 billion worth of buying.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
