It's The Dollar Brother

The greatest fear that people now have in the market more than Covid is a dollar rally. The word is out there that the entire rally in financial assets has happened on the back of a falling dollar and any change in that trend will cause a market reaction or maybe even a crash. Unfortunately, this has lead to every technical observation for a dollar bottom being used to justify the next crash. Technically I doubt we go back above 91, but who knows, if it does it would have an impact. The most recent outburst comes as traders watch this potential double bottom in price near 88.25-89.10.

I believe that you are in a bear market for the dollar and rallies might not be as constructive as some think. This despite data like the one below which shows Asset Managers with record short positions in Dollar futures. This data point has been making a cord for quite a while and that is where shorts are getting paid. Not what you see in a non-trending zone where each reading leads to a trend reversal. When oversold readings do not work, the trend is your friend. The chart of net non-commercial shorts however just went from long to short, but I wonder if one week is enough. 

So there are a few drivers worth understanding for this dollar bear market that have developed that you should be aware of. First and foremost that the US has a maximum of Treasury issuances coming up in the year 2021, that means a lot of govt debt that has to roll over and can't be allowed to fall on the market, this will mean more bond buying or QE.

A long term driver that has been working up is the reduction in dollars being held as reserves. This can happen either as more is held in Gold or as US treasuries are sold [China and Russia have been reducing their exposures over time]. The correlation between the two would hint that the dollar has a lot of catching up to do on the downside.

But a more apparent reason is trade. The increased use of Euros and not dollars in trade by these two big economies that are also commodity exporters/importers could be a spoiler. These are trends that were slowly building up and now all at once, the ratio is inverted.

In the world of Finance sometimes you can come up with arguments on both sides of the equation and finally it is about being right. Data is always right in hindsight. In the near term, I need more than a small bounce to confirm that the trend for the dollar changed. It can cause near term reactions in places like commodities whenever there is a small bounce. A dollar bull run would do any good to anyone and the FED has actively been backstopping the possibility. I do not think we should front-run a dollar bullish Call. If it happens we acknowledge it as it does. But I will continue to look for lower highs and lower lows eventually.