Janet Yellen gave Dollar Bears ammunition to look to the charts. Dollar Bulls are in abundance but that may be the problem. Once again the USD is an overweight long that despite the obvious presence of the Fed can’t get out of its way.
The fundamental reasons for the Dollars stagnation are in my view, very clear and have been playing out for some time:
- The Dollar index is predominantly based on a weighting against the Euro and the Yen. They combine to be more than 70% of the Index.
- The macro story in the EU continues to be the best in the world and this strength will push the Euro higher
- The Euro is a current account surplus currency which is not something the Dollar can say
- The Fed is not the only CB who is looking to pull back on accommodation; the ECB may tighten before they stop their QE thus CB divergences that were priced into the Dollar may need to be unwound
Technically, the Dollar is in a difficult place:
- Net positioning form hedge funds and macro players remains overweight
- The Dollar has been unable to break out despite the Fed and we have traded in a 2yr range despite consensus long Dollar views
- The charts show that the Dollar is sensitive to where the short term moving average(50dma) crosses over longer term moving averages (100dma)
A look at the chart shows that the Dollar has been following the pattern of the death cross and the golden cross over the last two years. We had a head fake on the down trend in September as we confronted a very different election result in the US. Ultimately not only did the Dollar rally on the Trump victory but the writing on the wall for this move was seen in October(see chart).
Today the Dollar saw the 50dma break below the 100dma and we expect this will put more downward pressure on the Dollar and thus further enable the negation Dollar correlation trades ( EM, Gold, Commodities).
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