Commercial traders in the US dollar scaled back their negativity dramatically last week. Their net position in the US Dollar declined from short approximately 24,500 contracts to just over 8,300. This is to be expected to some degree as commercial traders tend to be value traders that scale into and out of positions. Therefore, as the US Dollar moves to its lowest levels in eight months and a 6% decline since July’s peak, it makes sense that commercial traders would take some profits on their short positions. You can see the chart here.
The less obvious is the correlation shift between the US Dollar and the US equity markets. This relationship has been primarily negative since 2008. We’ve seen foreign investors come in and buy US equities on declines, which has supported the Dollar. However, since May this relationship has turned positive. The most likely scenario is safe haven buying in the Dollar rather than direct placement of foreign capital in the equity markets. The same shift in correlational relationships is also taking place in the gold and agricultural markets. This signals a significant shift in macroeconomic outlook.
The commercial buying as well as a weakening stock market should provide enough of a kick to give the Dollar a short term bounce. The Dollar is notorious for making new 30-day lows like it did last week and then rallying for a week or two. It is one of the true counter trend trades that are based on global volume in a safe haven currency. Over extensions in the currency markets upset the global balance of trade. Therefore, we expect Friday’s low of 79.72 to hold in the near term and will be placing protective sell stops accordingly. More conservative traders may wish to wait for the market to take out Friday’s high of 80.49 to signal the reversal.
