Minutes Digest for Jan 11 2021

The dollar is going gangbusters today, adding to its gains from the past couple of sessions. Lots of folks ascribing this move to short covering, with large speculators being net short nearly 40% of the open interest in dollar futures.

There are some problems with this. It's an awfully convenient scapegoat, but if you look closely at the chart above, you'll see that extremes in positioning don't always equate to bottoms in the dollar. This is the exact same reason people were giving for an "inevitable" dollar rally in September, but we saw at the time that this data doesn't work very well for some markets, the dollar being one of them.

The table below shows every "short covering" rally in the dollar since 1986. These are times when large specs were net short at least 30% of open interest, and then the buck jumped more than 1% over a 3-day period. Almost every one of these rallies petered out over a 1-3 month time frame. This is the kind of behavior we've seen during structural bear markets, not bull markets.