To The Moon

The US dollar $USD Index (USDindex.FOREX)$ has maintained a downward trend recently.  In early January 2023, the scale of hedge funds' shorting of the US dollar has hit a one-and-a-half-year high.

US Dollar Shorts Become Favorite Trade as the growing view that the Federal Reserve will slow the pace of interest-rate hikes is likely to keep selling pressure on the US currency.

While the US dollar continued to fall, many non-US currencies have recently rebounded. Data from the Commodity Futures Trading Commission shows leveraged funds have cut yen shorts to the lowest level since February 2021. They also trimmed bearish bets on the Aussie while switching to net longs on the New Zealand dollar.

The strong dollar ends？

In 2022, the Fed will raise interest rates 7 times in a row, thus the U.S. dollar index has been climbed from around 96 at the beginning of the year to 114.78 on September 28, 2022. Which is also the highest level of the U.S. dollar index in more than 20 years. However, in the last quarter of 2022, affected by the Fed's slowdown in raising interest rates and slowing inflation, the U.S. dollar index fell, marking the largest quarterly loss in nearly 12 years.

From the latest macro level, on January 6, 2023, the latest Nonfarm payrolls showed that the average hourly wages in the United States in December 2022 increased by 0.3% month-o-month and 4.6% year-on-year, both lower than expected. was revised down.

As the U.S. PMI manufacturing/non-manufacturing index continued to decline, the risk of a hard landing in the U.S. economy increased. The nonfarm payrolls data showed that U.S. wages and hourly wages have cooled significantly. The market believes that inflationary pressures have weakened, pushing the U.S. dollar index to continue to fall.

The end of 2022 is likely to mark the peak of the overvaluation of the US dollar. Anujeet Sareen, fund manager of Brandy Global Investment Management, said,

"The main drivers of the $USD Index(USDindex.FOREX)$ in 2022 include the relatively leading U.S. economic growth and relatively tight monetary policy. Last year, although the actual U.S. economic growth slowed down, Europe and China has experienced major economic growth challenges, resulting in the relative outperformance of the U.S. economy. At the same time, the FED raised interest rates by 400 basis points, exceeding almost all other major central banks. Overall, the dollar's strong gains last year Driven by a number of factors that will not continue this year. The value of the dollar is high, but the prospect of relative growth points to a depreciation for the dollar this year."

What arbitrage opportunities are there?

In an environment where the U.S. dollar is expected to fall, investors may consider hold Invesco DB US Dollar Index Bearish Fund $Invesco DB US Dollar Index Bearish Fund(UDN)$ to hedge U.S. dollar fell.

Since Octorber 1st, the $Invesco DB US Dollar Index Bearish Fund(UDN)$ has rise from 17 to 18.77, now in a seven months high. 

At the same time, there are some currencies that are favored.

For example, the yen $Japanese Yen - main 2303(JPYmain)$ rose to a six-month high to start the year, while the euro$Eurodollar - main 2303(GEmain)$ rose to a nearly nine-month high against the dollar.

• Contrary to the deceleration of inflation in the United States, inflation in Japan is heating up, and Japan's shift to a tighter monetary policy may benefit the yen.
• Inflation in Europe is likely to ease later this year, and fiscal policy in Europe will be more growth-friendly than fiscal policy in the United States.

With the Bank of Japan making further policy adjustments, HSBC strategists Paul Mackel and Joey Chew see the yen rising to 120 per dollar by the end of the year.

In addition, the recent appreciation of the $USD/CNY(USDCNY.FOREX)$ is relatively large. Goldman Sachs expects the CNY to strengthen to 6.5 against the dollar by the end of the 2023, compared with a previous forecast of 6.9.