Record Levels of U.S. Dollar Short Bets

The U.S. dollar is melting by the day. Never in recent history had a trend on the reserve currency been so strong as it is these days. 

In fact, asset managers’ positioning against the dollar is so extreme that it reached record levels. If we look at the chart below, the extreme positioning has little or no comparison with what happened in the aftermath of the 2008-2009 Great Financial Crisis. In other words, easing in 2020 far exceeds easing in the years that followed the Great Financial Crisis.

Reflation Theme Dominates

2020 was an unusual year on all fronts. The health crisis ruined the plans of both businesses and governments and threatens to do the same in 2021.

For now, the reason why the U.S. dollar falls across the board is the reflation everyone expects from the United States. In economic terms, reflation refers to economic growth (i.e., expansion in the level of economic output) on the back of fiscal or monetary stimulus. Note the “or” word. In this case, the magnitude of the crisis is so big that we talk about “fiscal and monetary stimulus” at the same time. As such, the U.S. dollar makes new lows by the day.

The EURUSD is the one pair that says it all about the greenback’s decline. It broke above the 1.20, and it seems like it freed itself from all the frustration built while below. It did not look back ever since, and at the time of this writing, it deals 1.2138 with literally no major pullback in the last 24-36 hours.

The U.S. dollar’s bearish trend is visible on other pairs too. The USDCHF gave way to the 0.90 level – a major milestone for the Swiss National Bank. Even gold recovered from its lows on the back of the dollar’s weakness.

As this week is the Non-Farm Payrolls week, it feels more and more like the market is squeezing U.S. dollar bulls into the year’s end. As a reminder, if one is long, the dollar and the market keeps selling it, by the time the market trips the stop, the short position is automatically squared by one long position. More precisely, short squeezing adds fuel to the fire as shorts end up buying at extreme levels only to cover their losses.

If the trend continues, it remains to be seen. Its strength already tells us what the market expects in 2021 – more fiscal AND monetary stimulus from the United States.