Dollar Run May Collapse without Market-Wide Fear Mongering
Following two weeks of impressive climb, the Dow Jones FXCM Dollar Index is finally taking a breather. Yet, this pause can prove more painful for the dollar and productive for risk-based assets than the recent reduction in volatility would suggest. Consolidation alone could encourage profit taking on short risk speculative interest and thereby leverage some pace on a correction. Escalating the situation even further, if speculators read the recent pullback as a good place to buy risk cheap, a temporary break could turn into a full-blown reversal. Technical traders no doubt recognize the potential on the Dollar Index itself. A head-and-shoulders index has been carved out of the past three trading days – a high-risk reversal pattern with the 10,080 range high over the 16-month standing as an immediate make-or-break level. The same pressure is read in many of the dollar-based majors. EURUSD has reversed around the same level as January’s swing low while NZDUSD marked a very obvious reversal from a multi-year trendline. Meanwhile, GBPUSD and AUDUSD have been more restrained but are ready to turn.
Most trends have a rest period. The difficulty is first in discerning whether it is a temporary correction or possibly a true trend reversal, and second how long the detour lasts. Despite the fact that the Dollar Index is fresh off its break to 16-month highs, follow through is not immediately guaranteed. Considering the dollar delivers negative real rates of return (inflation outpaces the yield on assets) on US Treasury and money market assets, the dollar’s dependency on fear and liquidity demand must be leveraged. Therefore, we should monitor benchmarks for risk trends (US equity indexes) and the level of panic behind sentiment shifts (implied volatility). While the S&P 500 put in for a sharp advance through Monday’s session, the dollar’s slide was relatively restrained. Feeding a consistent bull trend is a tall task for the greenback as it speaks to deteriorating, global financial conditions. Alternatively, a period of stability could encourage funds away from a currency that yield no return.
DailyFX
Most trends have a rest period. The difficulty is first in discerning whether it is a temporary correction or possibly a true trend reversal, and second how long the detour lasts. Despite the fact that the Dollar Index is fresh off its break to 16-month highs, follow through is not immediately guaranteed. Considering the dollar delivers negative real rates of return (inflation outpaces the yield on assets) on US Treasury and money market assets, the dollar’s dependency on fear and liquidity demand must be leveraged. Therefore, we should monitor benchmarks for risk trends (US equity indexes) and the level of panic behind sentiment shifts (implied volatility). While the S&P 500 put in for a sharp advance through Monday’s session, the dollar’s slide was relatively restrained. Feeding a consistent bull trend is a tall task for the greenback as it speaks to deteriorating, global financial conditions. Alternatively, a period of stability could encourage funds away from a currency that yield no return.
DailyFX
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