USD Net Longs Rise as Fed Signals Possible Rate Hike in December

Bullish bets on US dollar rose from $21.6 billion in the previous week to $28.0 billion against the major currencies according to the report of the Commodity Futures Trading Commission (CFTC) covering data up to November 3. Federal Reserve held its benchmark overnight federal funds rate in a zero to 0.25% range at its October 28 meeting but mentioned it will be considering interest rate liftoff at its next meeting on December 15-16. Policymakers characterized US economic growth as moderate in the statement that omitted reference to risks from global slowdown while they forecast that as the economy continues growing unemployment will fall and lead to higher inflation. Policymakers have indicated they will raise interest rate if they are reasonably confident that inflation will be heading back to target 2% level. The GDP report next day indicated US economy grew at 1.5% annualized rate in the third quarter, driven by 3.2% rise in personal consumption expenditures. Further incoming economic data, particularly on employment and inflation, will be crucial for December interest rate decision. Another central bank of a major world economy, Bank of Japan, kept its monetary policy unchanged at October 30 meeting as it opted not to expand its monetary stimulus program of 80 trillion yen ($662 billion) annual asset purchases to provide additional support to its economy suffering from a slowdown in China’s economic growth. The central bank cut its price forecast and delayed the timing for achieving the 2% inflation target by six months to the second half of next fiscal year between October 2016 and March 2017. Market participants expect Bank of Japan will be under pressure to expand monetary stimulus program as slowing Chinese economy and lower demand from emerging markets, as well as slow recovery of consumer demand weigh on Japan’s economic growth. Divergent monetary policy agendas between the US central bank, which is preparing to withdraw monetary stimulus, and central banks of Japan and European Union which are expected to expand stimulus measures, resulted in increase in bullish bets on US dollar. As is evident from the Sentiment table, the sentiment deteriorated for all major currencies. All major currencies are held net short against the dollar except for the British Pound.

The euro sentiment continued to deteriorate. The net short bets in euro widened $3.7bn to $18.4bn, with euro’s share sliding to 65.6% of long US dollar position. The euro net short position rose as investors increased short contracts by 30932 while they reduced long bets by 2532 contracts. The Japanese yen sentiment also deteriorated with the net short position in yen widening $1.0bn to $4.5bn. Investors increased the gross shorts by 14928 contracts and built gross longs by 5052. The sentiment continued to deteriorate also for the British Pound with the net long position narrowing $377 million to $18 million. Investors increased both gross longs and gross shorts.

The Canadian dollar sentiment remained bearish with the net short position widening $68 million to $1.4bn. Investors covered shorts as they cut gross longs. The sentiment toward the Australian dollar deteriorated at roughly previous week’s pace with net short bets narrowing by $0.16bn to $2.7bn. Investors increased both the gross shorts and gross longs. Swiss franc sentiment reversed as it turned bearish with the relatively modest net long position of $190 million flipping into a net short of $0.88 bn with the weekly rise in short positions exceeding the build in long positions by $1.0 bn.