Sometimes the mountain looks clearer from the plain the summit to paraphrase a American-Lebanese poet. The dollar appears to have entered a new phase on May 3. On that day, it reversed higher against the euro, yen, and sterling for lows not seen in a while.    

It is tempting to construct a fundamental narrative for the change.  However, the usual drivers are noticeable by their absence. The US economic data has been mixed, including the employment report that often sets the tone for the monthly data cycle. The US 2-year premium over German is flat over this period and about 10 bp smaller over the past fortnight. The US 10-year premium over Japan has narrowed eight basis points since May 3.   

Neither inflation expectations nor investors expectations for the June FOMC meeting have changed. The 10-year breakeven inflation rate has fallen four basis points to 1.60% since May 3. The implied yield of the June Fed funds futures contract has slipped a single basis point.  

The hypothesis the dollar’s resilience is a function of positioning rather than fundamental developments has broader explanatory power. Given the extreme positioning the futures market of the euro and yen bulls (gross positioning) relative to speculative positioning in sterling, helps explain why sterling is the strongest of the majors since May 3, falling only 0.6% against the greenback.  

Similarly, it also explains why the yen is the weakest of the majors. Judging from the speculative positioning in the futures market that was the most extreme position. Japanese officials threaten intervention and the yen still strengthens. Japanese officials threaten intervention and the yen weakens. Was the threat of intervention the driver the dollar’s bounce? 

Some of those that subscribe to the currency war narrative have been warning since mid-February of BOJ intervention. It has not materialized. Some observers imagined a secret protocol in late-February to all the dollar to weaken, which ostensibly made intervention more difficult. However, officials have consistently warned that Japan reserves the right to intervene in disorderly and one-way markets.