BNY’s Geoff Yu notes the US Dollar (USD) enters the Federal Open Market Committee (FOMC) with strong recent demand but stretched positioning, as cross-border buying and late-July spot demand remain supportive.
However, month-end rebalancing, light hedge ratios and softer cash demand raise the bar for further gains
Yu argues only a clearly hawkish Fed surprise is likely to restart broad USD buying. Stretched positioning into FOMC decision “The dollar enters the FOMC with strong recent demand but increasingly stretched positioning. Cross-border buying and late-July spot demand remain supportive, but month-end rebalancing, light hedge ratios, and softer cash demand raise the bar for another leg higher.
A clearly hawkish Fed surprise is now needed to restart broad USD purchases.” “Cross-border flows continue to anchor overall USD demand, and their lead in average flow scores remains clear. Dollar hedge removal and fresh longs were strongest in June, when the gap between cross-border and local demand was also widest. Even so, interest is softening into month end.” “For foreign investors, the lack of hedging on U.S. assets is beginning to look excessive.