Loading ...But the mighty US dollar has moved up too far too fast, it is super-overbought. Such anomalously sharp rallies quickly ramp greed and euphoria, which soon burn themselves out. Exciting widely-watched jumps to major highs suck in all willing and available capital, pulling future buying forward. That leaves nothing but sellers, resulting in sharp corrections that usually completely unwind the preceding fast rallies.
This first chart reveals that critical dollar-trading symmetry, fast moves up are nearly always followed by fast moves down. And the recent sharp dollar surge looks big even in longer-term context. The USDX just catapulted up to a 51.8-month high, levels not seen since soon after 2008’s once-in-a-lifetime stock panic. Incidentally that crazy event sparked the biggest and fastest USDX rally ever witnessed, on safe-haven buying.
There was major downside risk because any economic data or stock-market weakness that started to be perceived as staying the Fed’s hand on rate hikes could lead to fast selling of the crowded dollar long positions. Not to mention fast covering of the extreme euro and yen futures shorts, which would also hammer the dollar. And that’s what happened this week, the overbought dollar started collapsing fast.
The bottom line is the US dollar is super-overbought. Wall Street has always had a perpetually-bullish bias on the dollar, so mainstream traders were eager to pile on as it rallied sharply in recent months. A combination of ECB decisions hitting the euro, US stock-market selloffs, and hopes of the Fed starting to hike rates sooner rather than later catapulted the US Dollar Index up for a record 12 weeks in a row.
But such sharp dollar rallies to overbought levels, especially within the dollar’s secular bear when its supply-and-demand fundamentals remain very negative, soon crumble. The dollar falls as fast and far as it rose, reversing all the peripheral trades that suffered during the dollar’s rally. So sell the US dollar high when everyone loves it, and buy euros, yen, oil, and gold while they are still low before they rebound.
http://www.gold-eagle.com/article/us-dollar-super-overbought
Adam Hamilton, CPA
October 10, 2014