Chart Of The Day: Why Is Dollar Bearishness At A Sudden 5-Year High?

Chart Of The Day: Why Is Dollar Bearishness At A Sudden 5-Year High?  | Apr 16, 2018 10:01AM ET

On March 28 we asked whether the USD's FX market domination was over. We cited two events whose potential outcomes would likely diminish the greenback's unchallenged status as the global reserve currency: moves by various central banks to convert some reserves from USD to euro and China's planned launch of yuan denominated oil futures contracts.

China launching a yuan-denominated oil futures contract in particular has potential to re-rout significant investment away from dollar-denominated assets in favor of those denominated in yuan. Not only is China the world's second largest economy (and growing at more than double the rate of that of the US, with tonight's GDP expected at 6.8 percent YoY growth for the first quarter) it's also the world's single largest oil consumer.

Dollar Downers CFTC/Bloomberg Chart

Meanwhile, the Commodity Futures Trading Commission reported Friday that hedge funds increased the most net short dollar positions since August 2011.

What might be the catalyst for such bearish dollar sentiment? If anything, the dollar should have received a boost from Fitch's AAA rating reaffirmation last week.

Perhaps last Sunday's Washington Post Op Ed by former Fed Chair Yellen and other economists played a part in the sudden dollar bearish sentiment. The authors of the Op Ed warn that the recent tax cuts heralded by the market were delivered at the wrong time, "turning economic logic on its head." That's because the US is currently at or close to full employment and has been demonstrating consistent economic growth, requiring no boost.

Now that the arrow has been released, there is nothing left in the arsenal in the event of an economic downturn. Additionally, the tax cuts will inflate public debt, adding 1.6 trillion to the deficit over the next decade.

Furthermore, some holes in Fitch's logic may be contributing to the increased bearish dollar sentiment. In its report, Fitch warned that "the outlook for public finances has deteriorated since the last review." If this is the case, why did the credit agency keep the AAA rating?

It claimed that the US has the world's highest "debt tolerance," due to the dollar's status as the global reserve currency. This reasoning however, may prove to be problematic due to the various global central bank moves to change the weight of their currency reserves, compounded by yuan-denominated oil contracts. These two factors may eradicate the very thing that Fitch is relying on to offset rising public debt.

Euro Monthly Chart

On March 28 we published a weekly chart showing the formation of a symmetrical triangle. We can get a better appreciation for the outcome of an upside breakout of the EUR/USD pair to the symmetrical triangle in the chart above. It would include an upside breakout to its falling channel since July 2008, when the world bought dollars as a safe haven.

While developing the symmetrical triangle, the 50-week MA crossed above the 200-week MA, executing a weekly golden cross, and the 100-week MA is climbing as well. Should the price break out of the falling channel, it may suggest a macro uptrend for the euro, sending the dollar significantly lower.

Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (UK) English (India) English (Canada) English (Australia) English (South Africa) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 中文 香港 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
Saving Changes