When Donald Trump, unexpectedly for many, won the US Presidential election promising to ‘make America great again’, even his detractors agreed that his policies would see the US dollar strengthen. It promptly did – not by a huge amount, but the dollar index gained 5 per cent to trade at its strongest level since December 2002. This proved to be a blip and by April it was back in its box, a relatively tight trading band that had been in force since 2015. From peak it has now lost 12 per cent of face value and is clinging to key long-term chart support.
Better late than never, I suppose, but Bank of America’s September monthly Fund Managers Survey published a week ago showed that of the 181 who took part in this extensive questionnaire 26 per cent believed that being long Bitcoin was the most crowded trade. Long Nasdaq came second (down from the top spot in August) and in third place was short the US dollar. Note that from December 2016 to April 2017 the most crowded trade was consistently being long the greenback. This week Bloomberg reports that foreign exchange analysts at major banks are rushing to catch up with sterling’s reversal of fortunes.
The Trader, on the other hand, had warned months ago that the US dollar was too expensive and, sure enough, since January it has lost ground against every single currency we track – bar none. The star turn, ironically, has been the Mexican peso which, despite North American Free Trade Association (Nafta) worries, has gained 17 per cent against its northern neighbour.
Meanwhile the pound, which on the Bank of England’s Trade Weighted Index hit rock bottom in October 2016, has been forming a gentle rounded bottom since July that year, as can be seen on our cable chart. Because it is shallow and has taken a long time to build, I think many had not seen it coming, hence the 180 degree turn many analysts have been forced into. We expect it to continue rallying, possibly quickly as the rush out of a crowded trade sees them slashing positions at any cost, to $1.4000 at least and probably $1.4500.
The Australian dollar, where the key cash rate remains at a record low 1.5 per cent despite falling unemployment as in the previous two currencies, has broken above the top of the symmetrical triangle that has dominated for the past two years. One doesn’t often come across a triangle base, but this one, being so long in the tooth, looks set to mark an important low point for this pair. Realistically we would expect it to rally to the $0.8800-$0.9000 area over the next six months or so.
The other surprise has come from north of the 49th parallel where the loonie, Canada’s version of the dollar, has actually led the pack fighting US dollar strength. Interestingly it was at some of its weakest ever levels in January 2016 when it reached C$1.4700 to the greenback. As the Trump electoral campaign moved into gear it lumbered back up to C$1.3800, very much a reluctant countertrend move when compared to the sharp appreciation early in 2016. The last four months have also seen a dramatic move lower, so that we have alternated between impulsive and a corrective wave. Expect hesitation at the C$1.2000 area, followed by a drop to C$1.1500.
Charts for this piece Dollar index, GBP, AUD, CAD.
