Synopsis:

BofA's June FX and Rates Sentiment Survey reveals that while USD shorting remains the highest conviction trade of 2024, actual positioning still lags sentiment. Investors are wary of US fiscal risks and a fading "exceptionalism" narrative, yet resilient US data could challenge the bearish consensus.

Key Points:

USD Shorts Dominate—but Lag Sentiment:

• USD short remains the most crowded trade according to Exhibit 6.

• Despite strong conviction (Exhibit 7), actual positioning hasn't fully caught up to sentiment.

Unhedging US Exposure:

• Many respondents are reducing unhedged exposure to US assets (Exhibit 20), reflecting structural skepticism about the dollar’s long-term appeal.

Persistent Uncertainty:

• Trade uncertainty is expected to remain elevated (Exhibit 11), keeping downside pressure on the dollar.

• Expectations for waning US macro outperformance (Exhibit 10) further support a structurally bearish view.

Fiscal Risks Add to Pressure:

• Survey highlights growing investor concern over US fiscal sustainability (Exhibit 16).

• European fiscal outlook is modestly more hopeful (Exhibits 22, 23), which may reduce downside risks for EUR/USD.

USD's Lifeline—Data Resilience:

• Strong US economic data remains a potential offset to structural bearishness.

• If growth and inflation data continue to surprise to the upside, the dollar could defy negative positioning.

Conclusion:

BofA sees a disconnect between USD sentiment and positioning—investors are bearish, but not short enough. While fiscal and geopolitical risks weigh on the greenback, solid US data could still upset the consensus. The net effect is a market primed for volatility, with asymmetric risks for USD shorts if macro outperformance persists.