Analysts at Bank of America (BofA) highlighted a shift in market sentiment, with long positions in the US dollar identified as the most crowded trade, and now a significant headwind for the currency. This perspective is consistent with BofA’s recent reports on the US dollar, highlighting the stark contrast between current market positions and historical trends.
The analysts’ findings indicate growing concern among market participants about global inflation, especially with a new acceleration expected by 2025. Inflation expectations for the eurozone are clearly visible, underscoring broader concerns about inflationary pressures.
Moreover, while emerging markets (EM) investors appear to have discounted worst-case scenarios regarding rates, the upturn in sentiment is seen as cautious. The cautious attitude of emerging market investors reflects the uncertainty and challenges in the global trading environment.
BofA’s analysis shows that the strong positioning in favor of the US dollar could be problematic. The report, dated January 14, 2025, points out that the size of long positions in USD is exceptional, not only in a historical context, but also compared to the trends of the past year.
Furthermore, the disconnect between conviction and positioning is clear, with only a fifth of respondents considering long USD as their most convincing trade. This is despite 42% of respondents expecting 10-year US Treasury yields to peak above 5%, according to a separate piece of evidence from the bank’s survey.
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