Analysis: Is the Swiss scenario possible with the dollar? Investors warn of risks of following the herd
After Switzerland shocked markets by scrapping its currency cap, investors are beginning to ask whether the dollar should expect a policy surprise as well.
Analysts from Samson Capital Advisors LLC say the actions of the SNB, which sent the franc surging as much as 41 percent against the euro last week, was "a good reminder" of the risks of following the herd, just as speculators pushed bets on a dollar rally to a new high.
"People have to be re-assessing what their positions are," Jonathan Lewis, chief investment officer at New York-based Samson, which has $7.4 billion in assets, said by phone on Jan. 16. In the case of Switzerland, "people were betting billions of dollars on the kindness of strangers, people they'd never met, whose names they couldn't pronounce."
A shock from the Federal Reserve, such as raising interest rates less quickly than investors expect, may wreck the greenback after it advanced to the highest in a decade, State Street Global Advisors Inc. warned quoted by Bloomberg.
A slight decline in the U.S. economy, "just enough to make people say maybe rates aren't moving higher, the Fed is on hold - that could take some of the sheen out of the dollar's shine," Greg Peters, a senior investment officer at Prudential Financial Inc.'s fixed-income business in Newark, New Jersey, said Jan. 15 by phone. His division oversees $534 billion of bonds.
The extent of the dollar positioning is what is causing fears.
According to the latest data from the Commodity Futures Trading Commission in Washington, hedge funds and other large speculators pushed net wagers on the dollar strengthening versus eight major peers to a record 448,675 contracts in the week ending Jan. 13.
Expecting gains
Polls conducted by Bloomberg still see the U.S. currency gaining against all but nine of its 31 most-traded peers by year-end, after climbing against all of them in 2014.
This has helped convince investors to speculate on a stronger dollar and, some say, left them vulnerable to the vagaries of decision-makers and politicians.
"If we do have outcomes, either from the Fed that are less hawkish, or outcomes from the European Central Bank that are less dovish than are expected, those two could conspire" to hurt the dollar against the euro, Collin Crownover, the Boston-based head of currency management at State Street, which oversees about $2.4 trillion, said by phone on Jan. 16.
The same day, the euro plunged to an 11-year low of $1.1460 on speculation the ECB is preparing to announce currency-depreciating sovereign-bond purchases.
Federal Reserve
Fed officials urged "patience" on monetary policy at their December meeting, noting risks to the economy from lower oil prices and weak overseas growth. Futures contracts now show about a 50 percent chance the U.S. will raise rates to 0.5 percent or higher before October, while at the end of last year traders were betting on a September increase, says Bloomberg.
Bullish-dollar positioning may convey a sense of déjà vu among investors.
As CFTC data show, speculators boosted positions on the franc weakening against the dollar to the highest in 1 and a half years this month, only to be burned by a 21 percent jump to a more than three-year high on Jan. 15. The Swiss currency also registered an unprecedented 23 percent rally against the euro that day after Switzerland abandoned the cap that had been in place since 2011.
The Swiss announcement was all the more unexpected because, two days earlier, SNB Vice President Jean-Pierre Danthine re-affirmed the currency peg as a "pillar of our monetary policy." Central-bank President Thomas Jordan's insistence that surprise was necessary only sowed more doubt in the minds of investors about their other currency positions.
"Although Fed expectations continue to be shifted back in the markets, FX probably hasn't really focused on that," Derek Halpenny, the London-based head of European markets research at Bank of Tokyo-Mitsubishi UFJ, said by phone Jan. 15. "That could be a catalyst for some of the demand for dollars coming off."
