US dollar bullish bets fell to $5.9 billion from $6.58 billion against the major currencies in the previous week following the Federal Reserve Open Market Committee decision on March 16 to leave the interest rates unchanged, according to the report of the Commodity Futures Trading Commission (CFTC) covering data up to March 22. Policy makers scaled back their projection for US interest-rate hikes from four to two in 2016, noting global economic slowdown as downside risk for the US economy. Economic reports during the week showed the core inflation rose to 2.3% year over year in February from 2.2% in January, but the headline inflation declined to 1% year over year from 1.4%. Capacity utilization fell to 76.7% from 77.1% in the previous month. However the 265000 rise in initial claims for unemployment from the previous week’s 259000 was lower than expected, staying below 300000 for the 55th consecutive week, the longest streak since 1973. This points to another strong jobs report in March, the reason for Federal Reserve’s confidence in continued recovery of US economy and expectations for eventual rise in inflation to the policy target level of 2%. But the continued weakness in global economic growth as evidenced by slowing of China’s economy and the contraction of Japan’s economy in the last quarter of 2015 remains a limiting factor for US economic growth, which led policymakers to lower their forecast of where they expect the interest rates to be at year-end due to lower growth expectations. This resulted in lower attractiveness of US dollar as lower expected interest rates mean lower expected returns on US dollar deposits. Investors reduced the dollar bullish bets. As is evident from the Sentiment table, sentiment improved for all major currencies except for the British Pound and Swiss franc. And the Japanese yen, the Australian dollar and Swiss franc remain are still held net long against the US dollar.
The bearish euro sentiment moderated after the Federal Reserve’s surprise dovish statement and improved performance of euro-zone manufacturing and services sectors as indicated by higher Manufacturing and Services PMIs. The net short position in euro narrowed by $1.5bn to $9.2bn. The euro net short bets fell as investors cut the gross shorts and increased longs by 10521 and 983 contracts respectively. The bullish Japanese yen sentiment intensified based on higher haven demand for yen despite Japan’s declining trade balance in February and contraction in manufacturing sector in March: the Manufacturing PMI fell to 49.1 from 50.1 in February. 50 is the threshold level, readings below 50 indicate contraction. The net long position in Japanese yen rose $0.9bn to $5.9bn. Investors increased the gross long positions by 3386 contracts and cut the shorts by 4471. The British Pound sentiment deteriorated substantially after the Bank of England meeting. The central bank left the monetary policy unchanged, while the Office for Budget Responsibility cut its 2016 economic growth forecast to 2% from 2.4%. Continued concern about possible exit from European Union also contributed to bearish sentiment for the Pound. The net short position widened by $2.1bn to $3.3bn. Investors cut both the gross longs and shorts.
The sentiment continued to improve for the Canadian dollar with the net short position narrowing by $0.1bn to $1.1bn. Investors cut both the gross shorts and the gross longs. The bullish sentiment toward the Australian dollar strengthened with the net long position rising $0.4bn to $1.37bn. Investors built both the gross longs and shorts. Sentiment toward the Swiss franc deteriorated. The net long position narrowed by $127 million to $539 million. Investors cut the gross longs and covered the shorts.