Dollar bulls have taken quite a beating in the forex markets recently. The USD has broken its strong rally against essentially all other currencies in the world, as Mario Draghi contradictorily said that the ECB’s ultra-negative interest rates would stop there, ‘although facts can change’, as the BOJ left its current interest rates unchanged, and as the Fed stated that there would only be two other rate hikes this year (instead of the originally four promised for 2016).
In one week, the Dollar Index (DXY) went from a high of 97.02 to a low of 94.57. Still, as financial markets began to ponder exactly what all this means, the USD started staging a mild recovery last Friday. After all, unlike the ECB, the BOJ and most other European central banks, which are on a negative interest rate course, the Fed is on a rate hike course. There is also news circulating suggesting that the G20 has reached a ‘Shanghai Accord’, in which the most important central bankers of the world are said to have persuaded the Fed to slow down the rate hike rhythm, due to the damage that the strong USD was causing around the world – which is another reason to believe that, while slowing down, the USD uptrend may go on.
Be as it may, financial markets have been seeing a very strange trend lately, and traders should pay attention to it so to adequately position themselves to gain from it. The USD depreciated with its central bank keeping rates positive and on a hike course, whereas the EUR, JPY and NOK have appreciated with their central banks staying or going further down into negative rate territory. This is a counter-intuitive market reaction in currencies that signals that traders and investors are seeing these measures as signs of central bank despair, which also signals that central banks are losing control and influence over the markets.
In face of all this, Ridge Capital Markets firstly recognizes that these markets are extremely challenging to predict, since there are many counter-intuitive moves being made, and since a mix of fear and hope are running the show – and not technical factors, much less fundamentals.
We go on believing that the USD is offering traders and investors an excellent profit opportunity to trade on its temporary lows to go long on the USD/EUR pair. While we feel there are other forex plays in which the USD can win big against other currencies (such as the AUD), we place most of our attention on the USD/EUR struggle.
In a nutshell, the ECB desperately wants the EUR lower. The Eurozone is in a dire situation even with a low EUR, so having a strong EUR is something that the European Currency Bloc simply cannot have. We believe that the ECB will do everything in its power to lower the EUR and that, irrespective of what the Fed says or does, the USD will outperform the EUR. In fact, the recovery that the USD began to stage last Friday against the EUR and many other currencies is an encouraging sign that this trade will pick up strength to the upside, and that the USD bulls may come back for a violent revenge.
While risky, as all market moves are, and as markets nowadays are increasingly getting, we believe that there is a profit to be made by being contrarian and realizing that there are strong reasons to believe that the EUR will come down against the USD.
So, if the current consensus is that the USD bull market is over, perhaps trading against the consensus may be the best investment that traders can make (after all, the consensus EUR recovery does not seem to have any more room or steam to stay consensual).