For most of this year the US Dollar has been correcting its explosive gains from its breakout back in 2014. This process of big moves followed by consolidation is fundamental to the way asset prices move, and once the primary trend is established, these periods of consolidation provide excellent opportunities to invest, safe in the knowledge that once the correction is over, the primary trend will re-establish itself.
If we look at the chart below we can see the huge correction in the US Dollar from 2001, then the massive contracting wedge basing pattern through to 2014, followed by the emergence of a new uptrend and breakout to the early 2017 highs, and finally the correction through to now.
The negativity surrounding Trump is hardly surprising as he has been outmaneuvered on all sides by the very establishment he is trying to reform. This allied to a concerted effort by the mainstream media to undermine him at every opportunity has destroyed any credibility he may have had. And on those rare occasions when he has caught a break, he has quickly managed to shoot himself in the foot by his seeming obsession with inappropriate tweets. However, whilst President Trump's slide into tragic farce has impacted the dollar, the fundamental reasons to be bullish on the dollar strength remain.
Similarly, when we scratch beneath the surface of the renewed euro positive sentiment we can see that it is baseless. The fact that no anti-euro party was able to take control in any of the recent elections cannot hide the fact that the surge in anti-euro sentiment was substantial. This sets the stage for increased tensions as the global economy rolls over, the anti-euro vote grows and the two sides become more polarized.
These two trends have combined to create the dollar correction/euro gain that we have witnessed throughout 2017. However they are now getting long in the tooth, and a resumption of the primary trend is almost upon us. A view that is reinforced if we take a look at the technical picture.
Here is a more condensed version of the dollar chart showing the long basing pattern and the breakout. We can see that price has now arrived at a zone of support, and if we look at the RSI indicator at the bottom of the chart we can see that it is at its most oversold since 2008.
In we move in closer still, we can see that both the indicators at the bottom are starting to turn up, and that the RSI at the top of the chart, having reached a very oversold level, is also turning up, suggesting that the bottom is in.
One chart I often look at to corroborate what the price charts are telling me is the Commitment of Traders. These charts break down the ownership of different instruments, and allow us to see what positions the speculators (amateurs) and commercials (professionals) are taking. The commercials are rarely if ever wrong, and whilst the price reaction might not happen immediately, it pays to know what they are doing and not to bet against them. This is important to monitor because when positions become extreme they are often warning signs that a move is about to happen.
If we look at the Euro chart below, we can see that the commercials (red bars on the chart) were very long the Euro before it started its rally against the dollar back at the tail end of last year. We can also see that as the rally has progressed, the commercials have sold their positions and gone aggressively short. This is indicative that they are expecting a sell-off in the Euro, and corresponding rally in the dollar, at which point they can buy back their positions for a profit.
In conclusion, the fundamental reasons for a strong dollar have not change and the euro enthusiasm is past its sell by date. The technical picture backs up this view, with prices over-extended and the professional investors already positioned, suggesting a big move won't be far away.
This is an opportunity to get out of the euro and into the dollar for an impending rally that I believe will make most investors eyes water.
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