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Dollar Drops to Open Jackson Hole Week, Gold Probes Highest YTD Close

Dollar Drops to Open Jackson Hole Week, Gold Probes Highest YTD Close

Tyler Yell, CMT, Currency Strategist

Highlights:

  • US Dollar Index trades lower to start week as CFTC data shows bearish bets highest in 4 years
  • Metals extend their best rally in 3-years as China data continues to support Bull’s thesis
  • USD set to be favored funding currency for carry trade vs. EMFX as commodities rally
  • Sentiment Highlight concern for US concern for US equities continuation as bulls start to parade

Two sides of the same coin are that it is no fun to be a bull in a bear market and joy is equally lacking for those who insist on being a bear in a bull market. The latter has claimed many stock pickers who think, ‘this time is different.’ While the US Dollar is not in a bear market by traditional standards, many traders anticipating a bottom to be put in continue to find new sellers at a time they thought the stock of new sellers were running out.

On Friday, data from the CFTC showed that the net-short position on Dollar Index has swelled to the highest in four years. The extreme number of bearish bets makes some think a turnaround is just around the corner, but it is worth noting that without a catalyst for the Bulls, the most crowded trade in FX may become more crowded.

Of recent focus in the world of USD monetary policy is the acknowledgment that Gary Cohn, former president of Goldman Sachs and current National Economic Council Chairman for the Trump Administration is the likely front-runner for the Federal Reserve Chair job due for possible replacement of Chairwoman Yellen in early 2018.

The significance worth noting is that from evidence in times past, Mr. Cohn has seemingly struck a dovish tone that would favor fewer hikes than the three per year that the Fed Dot Plot has signaled as the median view through the end of 2019. Should a more dovish Cohn move closer to the head of the table at the Fed, there could be new reasons yet to keep the DXY trend moving lower, which would likely take USD/JPY to new 2017 lows below 108.13 and EUR/USD awfully close to 1.20.

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For now, most FX focus is on the rebound from late Friday volatility and in anticipation of the Kansas City Federal Reserve Annual Jackson Hole Policy Symposium. Ironically, Jackson Hole is expected to provide the greatest bout of volatility to the EUR based on implied volatility/ options readings. Outside of FX, the global market focus has been on Emerging Markets, which continue to outshine their developed market counterparts and base metals in the commodities sphere. Base metals are working to extend their best rally in three years as Zinc is trading near a 10-year high and Copper is trading at the highest levels since 2014. Not to be outdone, and correlated strongly to the Australian Dollar, Iron Ore delivered to Qingdao, China is trading near $80, accounting for a ~50% rise from the low of $53.36 that was seen on June 13. In the last six weeks, base metals have become the envy of the global macro landscape as they have climbed in the past six weeks on a nice mixture of faster global economic growth led by Chinese demand, a weaker US dollar and shrinking supplies led by China’s reduction of rogue supplies.

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While Gold has lacked the dizzying climb seen in base metals and digital currencies like Etherium, Bitcoin, and Bitcoin Cash, the latter which rose 67% last week, respect is required. Gold is working on the highest close of 2017, and such a fate would be obtained if a close above 1,293.10 that was seen on June 6 is realized. Like EMFX and Base Metals, Gold and other precious metals are benefitting from the weak USD and the ever-present geopolitical uncertainties of 2017.

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FX Closing Bell Top Chart: Gold works on highest YTD close, currently at 1,293.10

Dollar Drops to Open Jackson Hole Week, Gold Probes Highest YTD Close

Chart Created by Tyler Yell, CMT

Tomorrow's Main Event:EUR Euro-Zone ZEW Survey (Economic Sentiment) (AUG)

IG Client Sentiment Highlight:Concern for US Equities Continuation As Bulls Start to Parade

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

Dollar Drops to Open Jackson Hole Week, Gold Probes Highest YTD Close

Wall Street: Retail trader data shows 31.0% of traders are net-long with the ratio of traders short to long at 2.23 to 1. The number of traders net-long is 4.6% lower than yesterday and 80.7% higher from last week, while the number of traders net-short is 3.9% lower than yesterday and 15.3% lower from last week.

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

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

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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