FX Views : The Greenback Comeback

Like I said early last month, no one knew why the “USD is taking a beating and the big mystery of the year is that no one knows for certainty who is doing it or why with most reasons given to market positioning and stop losses, missing out the invisible central bank and their reserves flow, along with sovereign wealth allocation activities.” https://tradehaven.net/market/fx/market-thoughts-are-you-americas-friend-or-foe-usd-is-not-cool/

Well, in the past month, the USD has staged an breathtaking rally, the DXY index rising 2.11% which has not been seen since Feb 2013 when it rose 3.46%.  Happy days are back.

And the EUR has come off more than I had expected as the situation on Europe deteriorates on geopolitical fears, slowing economic fundamentals and that Banco Espirito Santo failure in the news.


Graph : DXY Index daily chart

Table : USD 1  month performance against other currencies

No one has been spared except for China and unless we want to consider the unpronounceable currencies of Mozambique, Haiti, Liberia (pray for them against Ebola), Afghanistan (called Afghani), and gang.

The top market positions remain as heavy as ever with only the NZD dropping out.

1. Short EUR
2. Long USD
3. Short JPY

Technical reports are screaming for EUR/USD medium term target at 1.2777 and for USDJPY to breakout higher, arhem, … soon.

Common sense says that USD will only strengthen from here for the medium term, so that chartists and strategists will have their day. Yet the market positioning remains a huge drag on instant gratification for USD bulls.

In the case of the EUR which the market is holding a record short since Jun 2012, positions may play a bigger role in deciding the direction for the short term as we have no other rival currency class to challenge the USD besides the EUR and the JPY.

Chart : EUR/USD vs CFTC Futures Positioning vs Citi EUR Pain Indicator
EURUSD CPAIN CFTC POSITION* The Citi Fx PAIN index is an indicator of the positioning of active currency traders. A negative reading suggests that currency traders have been net short the currency.

For that reason, the EURUSD spot has been pretty darn resilient to all attempts to break lower so far.

My other theory of the short term correlation between the EUR and the S&P appears to have expired (and like I said, it was short term). https://tradehaven.net/market/fx/market-thoughts-rattling-and-humming-away/

I also note that Silver has underperformed on the month and the only explanation I was offered is that the market will shortly moving to a new Silver benchmark that is electronic whilst Gold has not adopted a new fixing procedure as yet.

The Gold/Silver is near its YTD top at 65.48 and above its 5 year average of 56.83.

Chart : Gold/Silver 5 year spot price

Gold is more of a safe haven geopolitics hedge than silver, I would presume.

It gives me more reason to believe that Silver could be the new neutral and unbiased precursor of market direction to go forward and the rest of the field will play catch up.

The USD has been taking its own sweet time in this comeback for all our euphoria earlier on this year and the DXY index (which is 57.6% EUR, 13.6% JPY and 11.0% GBP) is finally in the green after an amazing run in July (we started the year at 80.035 vs current 81.53 +1.87%).

The trend is likely to persist as the other major economies continue to fumble along as we saw this morning with Japan’s largest economic shrinkage since 2011 and Australia with less than ideal wage growth despite strong consumer confidence. On the US homefront, the FOMC meeting really had no choice but to acknowledge their economic recovery although rumour mongers are now trying to sow the seeds of secular stagnation (CNBC : http://cnb.cx/1p1QRnE).

I also think the USD strength is partly be due to the end of central banks reserve rebalancing that should have wrapped up with the mid year closing in June.

All this as Obama continues to pound ISIS in Iraq which wins him many friends even as protests grow over Israel’s tactics in the Gaza strip.

Considering the resistance the DXY index has run into in the charts, I believe the opportunity to pile on the greenback is around the corner, under 81 or just about 1% lower to target the 2013 high of 84 which should net us a 3% return.

Chart :  DXY Index 5Y chart

Note : I will not be rushing to load up today. Not after enduring the painful crawl of the USD this year.

More haste, less speed.

Good luck !

Leaving you with a photo of what I was doing around this time last week, exploring the remote Murchison fjord in Svalbard.

Day 5 Murchison Fjor