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Dollar Pulls Back Into Month End, Long-Term Gains Favored

Dollar Pulls Back Into Month End, Long-Term Gains Favored

Tyler Yell, CMT, Currency Strategist

After a Cinderella week for US Dollar Index Bulls, profit takers emerged on Monday. Last week, the US Dollar Index recorded its best weekly return since the week the Federal Reserve raised rates in December 2016. The dollar effectively sold off consistently week after week with a few breaks until the opening week of September. Now, a massive unwind could develop in the USD short position that could lift US Dollar into the close of 2017.

Traders are looking to a slew of central banks this week kicked off by Bank of Japan who is exported to leave policy unchanged, but could provide a little excitement if they drop inflation expectations or explain new confidence in extended monetary policy off the back of Shinzo Abe’s victory from the snap election. Either way, the market looks set to extend short positions of the Japanese Yen as a bias is building to be long USD per the perspective of multiple derivative currencies markets like options and forwards.

Commodity currencies also look susceptible to further declines against the USD. The Australian Dollar is looking to lose its yield premium to the USD, and highly correlated Iron Ore is pushing closer to its 12-month low while the RBA continues to resist being confused as a hawkish central bank. Another aggressively sold currency is the New Zealand Dollar where the Finance Minister, Grant Robertson recently communicated a desire to adjust the mandate of the RBNZ to focus on employment growth. Given the export-dependent New Zealand economy, this is seen as a threat to NZD bulls.

Lastly, the Canadian Dollar could be in for a continued drop if the testimony of BoC governor Stephen Poloz further casts doubt on pending hawkishness by the Bank of Canada. Futures positioning shows Canadian Dollar long positions extended to the largest exposure since 2013 on the back of multiple BoC hikes before the Bank of Canada adjusted their rhetoric to being data-focused before discussing more hikes. Now, the options market is beginning to pay a premium for CAD-downside protection (USD/CAD upside) over the coming week and 3-month tenors.

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Strong/ Weak Index October 30, 2017

Dollar Pulls Back Into Month End, Long-Term Gains Favored

Chart created by Tyler Yell, CMT

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IGCS Highlight:NZDweakness may persist as ST retail bullishness is on the rise

Dollar Pulls Back Into Month End, Long-Term Gains Favored

NZDUSD: Retail trader data shows 72.5% of traders are net-long with the ratio of traders long to short at 2.64 to 1. In fact, traders have remained net-long since Oct 18 when NZDUSD traded near 0.71709; price has moved 4.2% lower since then. The number of traders net-long is 12.2% higher than yesterday and 36.8% higher from last week, while the number of traders net-short is 12.8% higher than yesterday and 16.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests NZDUSD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed NZDUSD trading bias (emphasis mine.)

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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