After having taken a summer hiatus I'm looking forward to getting back to business come September. Not so sure however if the currency markets are ready to get back to their old trending ways. I can't help but thinking there must be more to currency fundamentals than speculators getting squeezed out of short Euro positions every few months with price retracing from 1.28 or so back up to 1.34.
One reason the Greenback and the Euro have been stuck in a sideways range for so long is that currency markets are not responding to the uptick in U.S. interest rates as most economists and analysts would expect. Longer-term interest rates in the U.S. rose fairly sharply in late spring leading to a new 3-year high in the U.S. Dollar, and a weaker Euro. Yet when the dollar rally failed to follow thru into mid-summer, and U.S. interest rates stabilized, the dollar sold off while the Euro strengthened, keeping the currency markets in an overall counter-trending environment.
(click to enlarge)
Figure 1. U.S. Dollar Index with 100-day Moving Average
If not for the traditional summer dog-day timing we might be more concerned with the potential for an even larger rebalance for the Euro - "rebalance" being code for a primary dealer engineered short-coving squeeze. With Oanda's open position ratio currently showing 73% of open Euro positions being short - as of 8/18/2013 -- there certainly are a lot of traders, present company included, leaning toward one side of the boat, i.e. short Euro. Oanda' s overall open positions - Oanda is one of the larger Forex houses favored by both individual and institutional clients - are long the dollar with long USDCHF at 71% and long USDJPY at 66%. We see those long dollar positions as a reflection of the bullish dollar analysis by prominent dealers such as Deutsche Bank and Nomura.
Going back over the past couple of years we see the U.S. Dollar Index in Figure 1 is still exhibiting a bullish pattern with higher lows and higher highs affirming U.S. economic strength relative to her trading partners, and reminding us of the U.S.'s new found energy independence - a strategic long-term goal achieved. The Greenback has also been the recipient of money flows based on the continued uncertainty of a Chinese economic slow-down - modern markets have yet to experience that - and a downside correction in emerging markets.
Jay Norris is the best-selling author of The Secret to Trading: Risk Tolerance Threshold Theory. To see Jay highlight trade set-ups and signal in live markets starting in September go to: Live Market Analysis.
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