As the esteemed Sherlock Holmes would say, “Elementary dear Watson.” Coming into 2015, the positioning in investor’s portfolios was so asymmetric, that even a slight change in seasonality or tone amongst central banks could rock the boat. Being long dollar has been the mantra amongst portfolio managers and sell side all through last year, and rightly so. One could be right over a year, but could be terribly wrong over a few months. That is what “unwind” means, and what we have witnessed over the past two months as seen in the latest USD CFTC positioning data as well.
Commodities are inversely correlated to the dollar. As bonds fell across developed markets, especially in Europe, the “reflation” trade has resurfaced helping the Euro to rally. Softer US economic data further exacerbated this trend, forcing investors to take their leg off the long USD gas pedal.
As human nature dictates, a story needs (or rather must) be assigned to any move to appease to our intellectual sides. Stories range from China recovering in light of greater stimulus efforts to softer US economic data allowing the Fed some breathing room to raise rates later than September. There is no evidence of the former, as economic data remains weak. What concerns me with regards to the latter theory is the nature of its twisted logic. If US economic data is softer, threatening global economic growth, then surely Commodities (“growth sensitive” proxies) should sell off as demand falls?
C’mon reflationists….you can’t have it both ways!
Commodities are always pushed and pulled from all asset classes trying desperately hard to stand out, like the youngest child in a family of ten, but at the end of the day, fundamentals prevail and the state of physical markets dictate real price action.
