Synopsis:

Bank of America (BofA) has reported findings from its latest FX and Rates Sentiment Survey, highlighting a significant shift in market sentiment towards the US dollar. The survey indicates a substantial reduction in USD overweights and changes in market positioning, suggesting potential vulnerabilities for the USD in the near future.

Key Findings:

• Dramatic Cut in USD Overweights: The survey shows a notable reduction in USD FX overweights, marking the most pronounced change in sentiment since early 2021.

• Previous Survey Flags on USD Positioning: The previous survey raised three main concerns regarding USD positioning: 1) Overcrowding in USD longs; 2) Vulnerability to a repricing of the Federal Reserve's policy; 3) A market expectation of insufficiently priced global rate cuts, with the Fed expected to cut the most.

• Impact on Market Positions: Following the survey insights, there was a sharp reduction in FX overweights and an extension of USD duration overweights. The USD is no longer viewed as the most crowded trade, and there's less mispricing perceived in front-end rates.

• USD Less Vulnerable, But Risks Remain: Although the USD is currently less vulnerable compared to a month ago, the shift in US data and the Federal Reserve's dovish stance could lead to a continued unwinding of USD positions.

Conclusion:

The latest BofA survey points to a significant shift in market sentiment, with a considerable reduction in USD long positions. While this reduces some of the immediate vulnerabilities of the USD, it also opens the door for further changes, especially in light of evolving US economic data and Federal Reserve policy shifts. Market participants may need to closely monitor these dynamics for potential impacts on USD strength and currency market trends.