As US inflationary pressure remains conspicuous by its absence and signs emerge that the economy may be slowing early this year, speculators are returning to two of the most fruitful trades of last year: a weaker dollar and a flatter yield curve.
Chicago futures markets data show that hedge funds and other speculators now hold their biggest short dollar position against other major currencies since October, and last week took their biggest step in two months towards a curve-flattening position.
They are also sitting on their biggest ever bet that the Fed will raise interest rates, even if they tweaked their longer-term view on US rates and shape of the curve.
These shifts correspond with changes in spot currency and bond markets.
So far this month, the dollar has fallen against its major counterparts and the gap between two- and 10-year US Treasury yields has shrunk to its smallest in two months.
If you think US growth and inflation will be fairly subdued, it’s a winning combination.
And some key economic data releases lately suggest that is exactly how the start of the year is evolving.
January’s employment report revealed a surprisingly strong uptick in wage growth that triggered the surge in market volatility early last month.
But February’s jobs report saw earnings growth fall back again.
Add to that a widening trade deficit and soft readings on retail sales, industrial output and home sales, and suddenly the Q1 growth and inflation mix doesn’t look quite so conducive to aggressive Fed tightening.
The Atlanta Fed’s GDPNow forecast model now predicts 1.9% annualised GDP growth in the first quarter.
It was 3.5% on March 1.
According to the Commodity Futures Trading Commission, speculative accounts on the Chicago Mercantile Exchange increased their net short dollar position against G10 currencies to $14.4bn from $11.5bn the week before. That’s the biggest short position since October. A short position in a futures market is effectively a bet that the underlying asset will fall in price, and a long position is a bet it will rise.
They upped their net long euro holding to 146,380 contracts, the second largest bet on a higher euro since the euro’s launch in 1999, only behind the 148,742 contracts amassed in the first week of February.
With rate and bond futures contracts, a decline in price will push implied interest rates and yields higher, and rising prices will lower them.
The latest position shifts point to higher short-term borrowing costs and less conviction farther out along the curve, i.e. curve flattening.
At the ultra-short end, the amount of speculative net short positions in Eurodollar futures rose to a record 3.98mn contracts in the week to March 13. 
The Fed is widely expected to raise rates for the sixth time since December 2015, the first under new chair Jerome Powell.
CFTC data also showed speculators upped their net short two-year Treasuries position by the most in six weeks.
They cut their net short 10-year Treasuries holdings by more than 90,000 contracts, the biggest shift in eight weeks and one of the biggest in almost a year.
Combined, that’s effectively a bet on a flatter curve.
Last week, the gap between 10-year and two-year US yields shrank to just 52 basis points, the smallest gap since January, as investors cast increasing doubt on the Fed raising rates this year more than the three times already priced in.
It’s been a tough start to the year for hedge funds trading currencies and rates thanks to the “volmageddon” in early February.
Eurekahedge’s CTA/Managed Futures hedge fund index was down 1.25% in the first two months of the year, its Macro fund index up 0.52%, and its FX fund index up only 0.33%.

* Jamie McGeever is a columnist for Reuters. The views expressed are those of the author.