Friday , 24 November 2017


Major USD Downside Correction Coming Soon? "Crowded Trade" Suggests So

The latest CFTC report shows an extraordinarily high net long US dollar open interest in the futures markets…[which] is starting to increasingly look like a “crowded trade”. That makes the dollar quite vulnerable to a downside correction. [As such,] any hint of incremental monetary easing by the Fed that involves balance sheet expansion could force a violent reversal….Words: 410

So say paraphrased comments from an article posted in its original format* at http://soberlook.com.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say, in part:

Each week the CFTC publishes what they call Commitments of Traders. It basically shows the volumes of open futures positions by asset class. Even though the futures market represents only a fraction of the overall FX volume (most FX volume is OTC), it gives one a good window into what FX traders (particularly small- to medium-sized players as well as retail traders) are doing. The latest CFTC report shows an extraordinarily high net long US dollar open interest in the futures markets [as can be seen in the chart below].
 
 
Source: CFTC via GS

 

As one would expect this resulted in a tremendous (5%) rally in USD against major currencies in May [see chart below].

 

US dollar against currency basket (DXY)

 

Such a historically high long USD positioning in the futures markets is starting to increasingly look like a “crowded trade”. That makes the dollar quite vulnerable to a downside correction. Any hint of incremental monetary easing by the Fed that involves balance sheet expansion could force a violent reversal (such action could be adding to the dollar supply). Ironically a material action by the ECB or even the PBoC could do the same by making “risk assets” more appealing.

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Conclusion

Long the US dollar is clearly a good position to be in from a fundamental perspective given the global slowdown…[That being said,] the technicals from the CFTC report tell us otherwise. Other technical indicators may be pointing to the US dollar being overbought as well [and] this is particularly true given a rapid increase (from 10% of volume in 2010 to 18% recently) of retail currency traders (retail aggregators) who are known to pile into the same trade (usually late in the game) and then panic.

*http://soberlook.com/2012/06/long-usd-increasingly-looks-like.html?utm_source=BP_recent (To access the original article please copy the URL and paste it into your browser.)

Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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