Breaking News
0

The Long View: When Will Traders Jump Off The Bullish USD Trend?

By Faraday Research (Matthew Weller)ForexJul 12, 2018 05:25PM ET
www.investing.com/analysis/the-long-view-when-will-traders-jump-off-the-bullish-usd-trend-200330651
The Long View: When Will Traders Jump Off The Bullish USD Trend?
By Faraday Research (Matthew Weller)   |  Jul 12, 2018 05:25PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Heading into this year, there was a convincing case for a dollar rally. After all, the world’s reserve currency had fallen sharply against most of its major rivals in 2017 as the luster of the pro-dollar “Trump Trade” wore off and the realities of governing set in. As a result, speculative futures traders had flipped to a net short position of 7,000 contracts according to the CFTC’s Commitment of Traders (COT) report at the start of this year, the most bearish positioning since mid-2014. In other words, expectations for any dollar-positive developments were extremely subdued as we flipped our calendars to 2018.

As any pole vaulter will tell you, it’s relatively easy to clear the bar when it’s set too low. In this case, dollar bulls capitalized on the lopsided positioning and continued run of solid economic data in the first half of the year, driving the US dollar index to rally 7.5% off its February lows. The greenback has rallied by even more against currencies that traders were heavily net long such as the Canadian and Australian dollars (+8% and +9% off the February lows, respectively).

Unfortunately for US dollar bulls, the strong positioning tailwind at the start of the year is starting to peter out. According to the COT report, futures traders have now shifted back to a net long position in the dollar index, to the tune of 23,000 contracts. This is the most bullish reading in over a year and closer to the middle of the middle of the three-year range. In other words, the dollar

Make No Mistake

The Fed is still likely to raise rates at least once more this year, with the potential for another two hikes by the end of the second quarter of 2019, but the outlook beyond that is murky. In fact, as of writing in mid July, the eurodollar curve has inverted, signaling that traders believe the Fed is more likely to cut its benchmark interest than raise it in 2020!

As CNBC commentators remind us daily, the market is a discounting machine, meaning that the greenback is likely to peak well before the Fed switches to a more dovish outlook – whether that’s in H2 2019 or 2020. Indeed, the market’s skepticism over continued Fed rate hikes is the primary reason for the much-ballyhooed flattening of the US yield curve.

In contrast, the Fed’s biggest rival is likely to shift to a more hawkish posture over the next year. The European Central Bank is planning on winding down its asset purchases by the end of this year, with a new rate hike cycle set to kick off in 2019, assuming everything goes to script (always a big assumption when looking out at future economic developments). Sooner or later, forward-looking FX traders may start pondering the potential for the US-Eurozone interest rate spread to start tightening after spending the last three years growing wider.

Of course in trading, being right but early on a thesis is the same thing as being wrong. Accordingly, readers may want to wait for a sign that the dollar index is resuming its long-term downtrend before growing too bearish. The first level of potential support to watch will be the 2-month low near 93.20, followed by the 61.8% Fibonacci retracement of this year’s rally near 91. Alternatively, a break above the 1-year high in the mid 95s would show that strong bullish momentum is trumping any fundamental concerns and could open the door for a continuation higher toward 98 in time.

Weekly USD
Weekly USD

Source: TradingView, FOREX.com

Cheers

The Long View: When Will Traders Jump Off The Bullish USD Trend?
 
The Long View: When Will Traders Jump Off The Bullish USD Trend?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email