Goldman Sachs highlights a dramatic shift in market sentiment towards USD shorts as positioning adjusts ahead of anticipated Fed rate cuts. Despite tactical shifts, structural flows and high attractiveness of US assets may limit the USD’s decline.
Key Points:
Positioning Shift: Significant USD shorts have emerged, reflecting a market sentiment leaning towards USD weakness. This shift follows a move lower in the USD driven by the unwinding of long positions.
Historical Context: Historically, USD shorts often increase before the start of a cutting cycle. Despite this, Goldman Sachs sees parallels to the market's reaction to dovish Fed communications from December 2023.
Structural Flows: While tactical positioning has changed quickly, structural flows may take longer to adjust. The attractiveness of US assets and uncertainty surrounding the upcoming US election could dampen substantial USD declines.
Election Impact: The approach of the US election could further slow portfolio adjustments and impact USD movements, maintaining some support for the currency despite current short positioning.
Conclusion:
Goldman Sachs notes a significant increase in USD shorts, reflecting market expectations for weaker USD as the Fed potentially cuts rates. However, structural factors and the US election could temper the extent of the USD's decline.
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