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

The Dollar Pain Trade

Jason Goepfert
2021-06-23
The FX Pain indicator from Citigroup is showing heavy short positioning against the U.S. dollar. If markets follow through like they have after other periods during the last 15 years, the dollar should rally, causing problems for gold, commodities, and emerging markets.

Following the Federal Open Market Committee's explanation of their thinking on the economy and interest rates, the U.S. dollar exploded to the upside. It followed through for a few days before pulling back this week.

Speculators have been short the dollar (meaning "smart money" commercial hedgers have been net long), suggesting that the pain trade is to the upside. A "pain trade" is a move that will seemingly hurt the most participants, usually when they've positioned too far in one direction or the other. This doesn't always work very well in the dollar or other trending currencies, but it seemed to have an impact over the past week.

Citigroup calculates a similar metric called FX Pain. Per Bloomberg:

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.

NEAR-RECORD PAIN IF DOLLAR RALLIES

This measure recently dove below -60, the lowest in almost a decade, suggesting that traders are heavily positioned for a dollar decline.

We can see from the chart that whenever FX Pain for the buck is below -50, the dollar returned an annualized +2.2%. That doesn't seem like much, but it's a pretty decent return for a currency. Conversely, it returned an annualized -2.4% when FX Pain was above +50, so a pretty decent contrary relationship there.

There is a similar message being given from Hedge Fund Exposure to the dollar. When it has been below 25%, the dollar's annualized return was +2.6%.

Let's assume that this pain trade is going to result in a similar setup this time. We'll go back and look at each time when FX Pain dropped deep into negative territory and look at the subsequent rallies in the dollar.

WHAT A DOLLAR RALLY MEANS FOR OTHER ASSETS

On average, the dollar rallied for 154 trading days, with a median gain of just over 10%. The table below shows how other assets and indexes performed during those stretches.

It was a mixed bag for stocks, with the big exception being the depths of the financial crisis. Big tech stocks in the Nasdaq 100 fared better overall. Not surprisingly, the assets with the most consistent negative correlation to the dollar did terribly. Gold, commodities, and especially emerging markets all suffered losses. If the dollar reacts as it has during the past 15 years, then it will be a major headwind to those three markets.

In terms of major equity factors, there wasn't anything that stood out overly compelling. Defensive stocks fared the best, with the others all showing "meh" returns.

For major sectors, Discretionary stocks did well, with the lone exception being the financial crisis. We don't see this kind of behavior very often, but defensive sectors like Utilities and Health Care did well along with Discretionary stocks. The worst performers were Industrials and Materials, with only two gains out of seven attempts (though those two were big exceptions).

After other bottoms coinciding with these dollar pain trades, the buck sometimes chopped around for a few weeks after an initial surge. The biggest caveat would be a complete give-back of all the recent gains, which would be entirely out of character with the regimes above. If traders are going to follow through the way they have during recent reversals, we should see minimal losses in the dollar and a series of higher highs. That's going to be painful for gold bugs and investors trying to hold cheaper emerging market stocks.

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.