US Dollar: Even the Bears are Long USD According to BofA survey

Betting on further gains in the dollar exchange rate complex is so popular it is now without doubt the “most crowded-trade” according to a key money-manager survey, conducted by Bank of America Merril Lynch, in December. 

53% of panellists answered that the U.S dollar trade was crowded compared to only 32% who gave the same response in November.

Such was the bias to the long-dollar view, that the report's authors joked:

“Bulls are long the dollar, bears are long the dollar.”

The Bank of America Merril Lynch Global Fund manager survey, which includes interviews with 215 investment managers, showed that the vast majority expect the dollar to appreciate in 2016.

Commenting on the findings, Michael Hartnett, chief investment strategist at BofA, said:

“The long dollar view is writ large across all asset, regional and sector allocations. It will take a very dovish Fed and weak U.S earnings to reverse the strong dollar view in 2016.”

The majority of respondents (52%) put the dollar rally down to expectations of the Fed tightening, and that it would require an end to the tightening cycle to end the bull market in the dollar. 

Fed to hike not once, not twice but...

Survey respondents were generally more hawkish-than-expected, forecasting that the Fed would raise rates several times in 2016:

“58% of Global Fund Managers expect the Fed to hike rates at least three times in the next 12 months,” said the report.  

This echoes, but is not quite as hawkish as, the views held by Deutsche bank economists, who see the Fed raising rates three times by the middle of 2016:

“Our economists believe the Fed will hike rates by 75bps by the middle of 2016 – and then pause of the rest of the year.” Deutsche Bank European Equities report.

If the Fed hikes rates at least three times during 2016, as the survey indicates, it would assume a mid-paced hike trajectory, which runs contrary to some of the current vogueish market expectations that the Fed may wrap its first rate hike in dovish language, such as expressed recently by analysts at Blackrock:

“It is possible they will hike and accompany that with very dovish language and also very dovish management of the trajectory of the rate hike path, which is our base case.”

The most popular factors identified by respondents as potentially halting the dollar rally, were an end to rate hikes (35%), Negative U.S earnings growth (23%), China Renminbi devaluation (12%), OPEC Production cuts (8%) and BOJ/ECB announce end of QE (6%).

Fall off in risk appetite and down-beat on China

The survey highlighted a fall in risk taking, with average cash holdings increasing to 5.2% of portfolios, from 4.9% previously.

A much higher 43% of regional fund managers expected that the Chinese economy would weaken in 2016 – down from only 4% previously.

Weighted average GDP projections for China in 2018 fell to 5.5% from November’s 5.9%.

29% of investors were net underweight commodities from 23% last month.

Europe and Japan were most popular overweights for equities in 2016.