Has A Sentiment Extreme On DXY Been Seen?
Faraday Research | Sep 27, 2017 06:53AM ET
It’s no secret the US dollar has had a dreadful year, but bulls have tried to defy the gravity of 2017 by pushing the USD Index (DXY) to a four-week high. The Fed have played a part here, via confirmation of quantative tightening and the revival of December hike hopes. And comments from Lady Yellen, who’s still on side of a ‘gradual rate rise’ along with euro outflows following Germany's election helped provide another boost for the flailing dollar.
The sands for USD could be shifting
Despite DXY’s best efforts to do so this year, markets don’t generally move in straight lines. Technically it remains too soon to call a bull market for the USD, but there are indications that a deeper correction could be due. Two indications that bearish sentiment is approaching (or approached) an extreme include the broad positioning of the USD and from the CESI (Citi Economic Surprise Index).
USD shorts most bearish since January 2013
With so many people now short the USD, warning signs are at least there for an over-crowded trade. Whilst this indication provides no clear signal of a long-term buying opportunity on DXY, it can be viewed as being at a sentiment extreme, and that downside could be limited or a deeper correction is due.
Economic data is not as bad as it was (overall)
The CESI also shows that the USD has continued to move lower, despite economic data improving relative to consensus views.
CESI (Citi Economic Sentiment Index)
- Below 0: Economic data underperforms forecasts
- Above 0: Economic data outperforms forecasts
That soft economic data is now underperforming forecasts at a much slower rate than six months ago could be viewed as a turning point for economic data. That DXY has continued to fall, despite the bullish divergence of poor economic data brings into question if USD bears have overdone the downside for now.
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The correlation with DXY is not perfect, but close enough to consider the downside may at least slow down. As technical traders, we remain observers of this sideshow, as downside triggers for USD certainly remain. It could, for example, only take another failure of Trump’s tax plans, the Russia investigation to heat up or North Korean tensions to escalate further for things to go wring for the USD. In the mean-time, we’ll monitor USD crosses in light of the resurgence of DXY to see if sustainable trends and opportunities occur.
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