Data &
Technology
Research
Reports
Report Solutions
Reports Library
Actionable
Strategies
Free
Resources
Simple Backtest Calculator
Simple Seasonality Calculator
The Kelly Criterion Calculator
Sentiment Geo Map
Public Research Reports
Free Webinar
Pricing
Company
About
Meet Our Team
In the News
Testimonials
Client Success Stories
Contact
Log inLoginSign up
< BACK TO ALL REPORTS

Dollar falls into correction for the first time in years

Jason Goepfert
2020-09-01
The U.S. dollar has fallen into a correction, down more than 10% from its prior 52-week high. That ends more than a 2-year streak without this kind of a drawdown. Sentiment is sour, as falling real rates have pushed pessimism to an extreme. But that hasn't been a good reason to expect a lasting turn.

In March, all the talk was about demand for dollars, the safest reserve currency in the world. Now it has swung to the idea that the buck may lose its reserve status. Sentiment is a funny thing.

For the first time in over two years, the dollar has dropped more than 10% below its prior 52-week high. That may not seem like a lot given how much markets have been swinging in recent months, but it's a fairly rough drawdown historically.

This ends the dollar's 6th-longest streak without being more than 10% below its high.

In past notes, we've seen that negative momentum in the dollar tends to persist. That's the case here as well. Other than a modest tendency for positive returns over the next couple of weeks, when the dollar fist falls into a correction, its forward returns were mostly below average.

Though they generally have a negative correlation, this bias in the dollar didn't help gold too much.

Or stocks.

The prolonged decline has pushed the 50-day average of the Optimism Index below 30 for only the 2nd time in the past decade. The only other time sentiment got this low was in April 2011 which proved to be a turning point. But currencies have more of a tendency to trend against sentiment extremes, and this happened through much of the 2000s for the dollar according to the Backtest Engine.

The Optimism Index is driven in part by futures positioning, and large speculators in dollar futures are holding more than 25% of the open interest net short. This is typically a reliable contrary indicator in most markets, but the Backtest Engine shows it has not been for the dollar.

Pessimism has been driven lower on an almost tick-for-tick basis by the fall in real 10-year interest rates. The 3-month correlation between the dollar and real rates is now among the highest in years.

High correlations have not been a good reason to expect the dollar's downward trend to reverse any time soon.

One interesting wrinkle with this is that when markets have been driven so much by the trend in real rates, growth stocks had a tendency to underperform value over the next several months.

Another measure showing an extreme in the dollar is the Pain Index from Citigroup.

"The Citi FX Positioning Alert Indicators infer positioning of active currency traders from relationships between exchange rates and currency managers' returns. A positive reading suggests that currency traders have been net long the currency and a negative reading suggests that currency traders have been net short the currency."

That index just fell below -40 for the first time in almost a year.

There isn't a long history here, but other times it fell below -40 for the first time in months, the dollar snapped back short-term but usually wasn't able to hold those gains.

It was not a great sign for gold, either.

Stocks had very mixed returns depending on the time frame.

There remains little in the studies we've looked at in recent weeks giving a high probability that the risk/reward in the dollar is positive. When a trendy currency gets moving like this, it's hard for it to turn, even when sentiment is sour.

Sorry, you don't have access to this report

Upgrade your subscription plan to get access
Go to Dasboard
DATA &
TECHnologies
IndicatorEdge
‍
BackTestEdge
‍
Other Tools
‍
DataEdge API
RESEARCH
reports
Research Solution
‍
Reports Library
‍
actionable
Strategies
Trading Strategies
‍
Smart Stock Scanner
‍
FREE
RESOUrCES
Simple Backtest
Calculator
Simple Seasonality
Calculator
The Kelly Criterion
Calculator
Sentiment Geo Map
‍
Public Research Reports
‍
Free Webinar
COMPANY
‍
About
‍
Meet our Team
‍
In the News
‍
Testimonials
‍
Client Success Stories
Pricing
Bundle pricing
‍
Announcements
‍
FAQ
© 2024 Sundial Capital Research Inc. All rights reserved.
Setsail Marketing
TermsPrivacyAffiliate Program
Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

Testimonial Disclosure: Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.