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Dollars Longs Get Caught On Mispositioning

Published 11/19/2015, 07:38 AM
Updated 07/09/2023, 06:31 AM

Market Drivers November 19, 2015
  • Dollar Longs get shaken
  • UK Retail Sales misses a bit
  • Nikkei 1.07% Eurostoxx 1.09%
  • Oil $41/bbl
  • Gold $1074/oz

Europe and Asia
GBP: UK Retail Sales -0.6% vs. -0.4%

North America
USD: Weekly Jobless 8:30
USD: Philly Fed 10:00

Lopsided dollar long positioning resulted in a nasty short squeeze in Asian and early European trade pushing EUR/USD through the 1.0700 level while Aussie inched towards .7200.

Yesterday's FOMC minutes made it relatively clear that barring serious exogenous shocks, the Fed is likely to begin normalizing rates at its December meeting. But the tone of the report left enough of a doubt to stop any further progress in the dollar rally. With dollar longs greatly overextended the market set itself up for a short covering rally in the majors which quickly turned into serious short squeeze by midday Asian trade.

Europe has continued the move with EUR/USD now trading above the 1,0700 mark and the push higher may proceed through North American trade. With the dollar grossly overbought the pair was due for a bounce and the 1.0600 figure appears to have become rock solid support for the time being. EUR/USD may rebound for a couple of hundred points on the assumption that the Fed hike is now "priced in", but over the longer term horizon it's difficult to see how the pair could sustain its rally given the policy divergence between ECB and the Fed.

Still we have argued for a long time that the dollar rally may indeed peter out just as the Fed moves on rates precisely because it is likely to follow the one and done course as it carefully observes the impact of tightening on the US economy. Perhaps the market has already come to that conclusion and further gains in the greenback will become more difficult to achieve until the market becomes convinced that the Fed will start to follow a traditional tightening path.

Meanwhile, it's another slow day on the calendar with only jobless claims and Philly Fed numbers on the docket. US data has been lackluster as of late although it hasn't had much impact on Fed rhetoric. Still any downside surprises in today's second tier reports will only serve to accelerate the short squeeze that started last night.

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