Dollar and CTA Index Show Strong Surge, Trend Followers Focus on Currency Risk

According to Bank of America, the correlated upward movements of both the Dollar and the benchmark CTA index last Thursday indicate that Commodity Trading Advisors (CTAs) are maintaining a strong long position in the US Dollar. This trend has been consistently ongoing; the Dollar has shown gains in five of the last weeks and in 13 of the last 14 weeks.

Two weeks ago, it was noted that some trend followers might allocate more risk to the foreign exchange (FX) markets, as the currency trend is relatively stronger compared to trends in stocks, bonds, and commodities. This could be a significant factor, as a reversal in the Dollar and subsequent CTA unwind could occur more aggressively due to increased risk allocation.

Next week, an increase in short positions in the Japanese Yen among trend followers is anticipated. Furthermore, it was noted that the Brazilian Real was recently added for daily updates, with the model indicating that if CTAs are active in this market, they would be in a long position against the Dollar.

According to the model, trend followers are likely still long in the S&P 500 and NASDAQ-100, but due to the decline in price trends and increased realized volatility, their positions have moved away from peak levels. The NASDAQ-100 sell trigger in the model suggests that trend follower selling could intensify if the level reaches 20,880.

Regarding the Russell 2000, if the long position still exists, it should be close to flattening in the near term. Outside the US, CTAs appear to be long in Nikkei 225 futures and neutral in EURO STOXX 50 futures.