After the non-farm payrolls "emergency brake," Wall Street collectively "shorts the dollar" again

The expectation of a Federal Reserve interest rate cut has significantly increased due to non-farm payroll data, but the actual decline of the US dollar has been less than expected. Nevertheless, the three major investment banks on Wall Street are collectively bearish on the dollar, believing its valuation is too high and its fundamentals are weak.

According to news from the Chasing Wind Trading Desk, Citigroup, Goldman Sachs, and Morgan Stanley recently published research reports stating that the long-term logic for the dollar's decline remains valid when analyzed from multiple dimensions such as valuation, trade deficit, and interest rate differentials, and there is still significant shorting space for dollar positions. After last week's non-farm payroll data, the dollar's downward momentum was suppressed due to the pressure on risk currencies and the specific weakness of certain currencies, and it did not fully release immediately.

Looking ahead, the three major investment banks unanimously hold a bearish outlook on the dollar. Citigroup believes that the current valuation of the euro/dollar is still below fair value and has the potential to overshoot to 1.20; Goldman Sachs points out that the dollar's actual trade-weighted exchange rate is still 15% higher than its long-term average; Morgan Stanley emphasizes that policy uncertainties, such as changes in the Federal Reserve leadership, also add downward pressure on the dollar.

However, short-term trends still hold uncertainties. Citigroup believes that the dollar positions of leveraged funds have become flattened, and the previous large-scale liquidation wave may have come to an end. Therefore, the next movement of the dollar will highly depend on three potential catalysts: the nomination of new Federal Reserve governors, the uncertainty of employment data brought about by changes in the leadership of the Bureau of Labor Statistics, and the CPI inflation report to be released on August 12.

Weak Employment Data Triggers Market Reaction, but Dollar's Decline is "Less Than Expected"

Citigroup stated in its report that the US labor market data released last Friday was as weak as expected, which is one of the core reasons for Citigroup's bearish outlook on the dollar in the third quarter. Before the data was released, the market expected about a 30 basis point rate cut from the Federal Reserve this year; after the data was released, this expectation quickly doubled to about 60 basis points.

However, a noteworthy detail is that despite such a significant shift in interest rate market pricing, the actual decline of the dollar has been relatively "mild," not fully keeping pace with interest rates (except for dollar/yen). Citigroup analyzed the reasons behind this:

• The Swiss Franc (CHF) experienced specific weakness due to unexpected tariffs on Switzerland.
• Risk-related currencies such as the Australian Dollar (AUD), New Zealand Dollar (NZD), British Pound (GBP), Swedish Krona (SEK), and Canadian Dollar (CAD) were pressured by stock market sell-offs, limiting their gains against the dollar.

This means that the downward momentum of the dollar has not been fully released immediately.

Wall Street's Three Major Banks Bearish on the Dollar: Short Positions Still Have Significant Space, but New Catalysts Are Needed

Despite the mild reaction of the dollar, Citigroup emphasizes that the logic for the dollar's decline remains valid from a valuation perspective. Taking the euro/dollar as an example, its current exchange rate is still below fair value, and this valuation gap itself can drive the exchange rate higher without new catalysts. Citigroup's report even suggests that the euro/dollar has the potential to overshoot to the level of 1.20

Goldman Sachs' report also analyzes that, from the perspective of the broad real trade-weighted exchange rate, the US dollar is still 15% higher than its long-term average; at the same time, the US current account deficit accounts for as much as 4% of GDP. These fundamental factors, combined with the continuously narrowing interest rate differentials, are unfavorable for the dollar.

Morgan Stanley believes that domestic policy uncertainty in the United States is also putting pressure on the dollar. After the resignation of Federal Reserve Governor Kugler, the leadership of the Federal Open Market Committee faces uncertainties; at the same time, any distrust in the economic data from the Bureau of Labor Statistics (BLS) could lead to an increase in the term premium of US Treasury bonds, thereby weakening the dollar. From a positioning perspective, Morgan Stanley's indicators show that dollar positions are currently at a neutral level, leaving "huge space" for investors to increase short positions on the dollar.

However, investors must note a key change: the dollar positions of leveraged funds. After several weeks of intense volatility, the dollar positions held by leveraged funds may have significantly decreased, becoming more "flattened." This indicates that the large-scale liquidation that previously drove the dollar down may have come to an end. In the illiquid market of August, it may be necessary to rely on new, strong catalysts.

Three Potential Catalysts: The Next Trigger Point Investors Should Focus On

Citigroup's report clearly identifies three key events that could trigger the market in the coming days to weeks, which are the core basis for investors to formulate their next strategies:

1. Nomination of Kugler's Successor (The Most Direct Catalyst): The report believes this is the major event that is likely to occur first and is expected to be bearish for the dollar. Citigroup speculates that President Trump may choose a successor from his short list of candidates for Federal Reserve Chair, with Warsh or Hassett being the most likely candidates. If either of them is nominated, the market will quickly interpret it as a future "shadow chair," indicating that the balance of future Federal Reserve policy will tilt further towards dovishness.
2. Uncertainty from Changes in BLS Leadership: The replacement of the BLS director adds complexity to the next employment report. The report presents an interesting "trader's perspective": the market may now be more concerned with the "outcome" of the data rather than its "accuracy." This means that market participants may anticipate that reports under new leadership will lean towards "strong," leading them to position long on the dollar ahead of the data release, which could result in a rebound of the dollar before the data is published.
3. CPI Inflation Report on August 12: This is another risk point that cannot be ignored. The report analyzes that while core services inflation is normalizing, core goods inflation may continue to rise due to tariffs, ultimately pushing up the overall inflation rate. Currently, the median monthly forecast for CPI (0.3%) has remained unchanged, but actual data for most months this year has been below this expectation, indicating that the market may be experiencing complacency Once inflation data unexpectedly rises, it will challenge the narrative of the "Federal Reserve's rapid interest rate cuts," thereby supporting the US dollar