Traders Position Into Commodities Amid Upcoming Rate Cuts.

The rapid devaluation of the US dollar has triggered a rally in currencies and commodities as traders prepare for the anticipated start of the Federal Reserve’s monetary easing cycle next month. The US dollar index fell by 0.8% to 100.60 points, its lowest level since July of last year, after Federal Reserve Chairman Jerome Powell stated at the Jackson Hole symposium that it was time to cut interest rates. This extended the dollar’s decline in August to over 2%, putting it on track for its worst month of the year.

The depreciation of the world’s primary reserve currency has sparked a rally among its major competitors, with the Australian dollar rising by 1.2% to 67.99 cents, its highest level since December. The New Zealand dollar increased by a similar percentage to 62.37 cents, the British pound reached its highest level since March 2022, and the Japanese yen also appreciated.

The weakening of the dollar has also boosted commodity prices, as it makes dollar-denominated commodities cheaper for consumers outside the United States. Gold surpassed $2500 per ounce again, and Brent crude oil jumped by 2.3% to $79 per barrel. Copper led the gains among base metals on the London Metal Exchange, rising by up to 1.6%.

These movements reflect growing confidence among investors that the Federal Reserve will reduce interest rates faster than other central banks, as the US central bank shifts from combating inflation to protecting jobs and achieving a soft landing for the economy.

This also means that traders have become less optimistic about the US dollar. Hedge funds, asset managers, and other speculative traders hold around $3 billion in bets related to a stronger dollar, which is about 90% less than the peak reached earlier this year. Meanwhile, an increasing number of them are starting to bet against the currency.

“The time for rate cuts has come, and currency markets are clearly seeing this as a time for short positions on the dollar,” said Kamakshya Trivedi, head of global currency strategy at Goldman Sachs.

Mismatch “This is understandable because the dollar starts from a high-value position, and because the Federal Reserve might and likely will adjust real rates faster than other central banks.”

Futures markets have increased bets that the Federal Reserve will make a significant half-point rate cut next month, with the probability at 37%, compared to 25% a week ago. Traders have assigned a 63% chance for a quarter-point cut. They expect around 100 basis points of monetary easing this year.

In contrast, the Reserve Bank of Australia is not expected to cut interest rates until at least December, and even this scenario remains in question. “A rate cut [by the Reserve Bank of Australia] by the end of the year is still priced in, which seems unlikely, providing more potential for an appreciation of the Australian dollar,” said Richard Franulovich, head of currency strategy at Westpac. “US70¢ is an achievable target before the end of the year.”

The next major catalyst for the US dollar is the release of non-farm payroll data in the US next week. JPMorgan noted that currency markets “are clearly preparing for volatility around this event.”

ING economists believe that if the data shows values below 100,000 and the unemployment rate rises to 4.4% or more, the most likely scenario is a half-point rate cut by the Federal Reserve, which would put additional pressure on the US dollar.

However, Goldman believes that the pace of monetary easing by the Federal Reserve is unlikely to significantly exceed that of its global counterparts. “A faster rate cut by the Federal Reserve will likely be followed by faster adjustments in other jurisdictions, especially as economic activity data disappoints,” said Mr. Trivedi.

The broker emphasized that China’s growth target seems unattainable without additional policy support, and data from Europe shows more signs that restrictive policies are putting pressure on economic activity.