Market Insights / Commentary

Does anyone, anywhere, want to own dollars?

By David Russell

We’re in the thick of corporate earnings season, but some traders might start to wonder if the real story isn’t happening in the currency market. It’s a good time to take a look — especially ahead of the European Central Bank’s potentially key meeting tomorrow.

Take the conundrum of the U.S. dollar. Executives and economists love pro-growth tax reforms. Politicians in Washington called off an embarrassing government shutdown. Bad stuff like unemployment and jobless claims are also at long-term lows while good stuff like retail spending and industrial employment are near long-term highs. The U.S. is even on pace to become the world’s top energy producer as early as this year. But none of those factors have helped the U.S. dollar index (@DX on TradeStation), which closed yesterday at their lowest level since late 2014.

One reason is that conditions have improved overseas. Just look at German’s Zew confidence survey yesterday and last week’s GDP data from China. Plus, the World Bank and International Monetary Fund both raised global growth estimates this month.

TradeStation customers know a lot more is going on. With a few clicks of the mouse they can add the “COT Net Position” to their Chart Studies and track bullish and bearish bets on a whole slew of futures products. (COT stands for “Commitments of Traders.”) Savvier users are honed into CME’s Euro Futures (@EC), which move opposite the U.S. dollar because they track Europe’s common currency. The COT data shows almost 140,000 long contracts by professional investors and another 42,000 upside bets by smaller speculators. Both readings are near their highest levels in a decade following a spike in late 2017. In other words, not only is the Euro rising, but momentum players are piling in.

Euro Futures. Red and green lines at bottom show COT data.

Euro Futures. Red and green lines at bottom show COT data.

What about President Donald Trump? Didn’t he just slap tariffs on foreign solar panels and washing machines? Won’t his protectionist stance bolster the greenback?

This has been a common assumption of many people, but what if the opposite is actually true? What if the easiest way for foreign countries to appease the president’s chest-beating is simply to let their currencies appreciate the U.S. dollar and thereby satisfy one of his oldest grievances? What if this has been quietly happening? Is that why @DX has only had three positive months in the last year?

Chart watchers might offer one more thought. Yesterday, they noticed that the Market Vectors Gold Miners Fund (GDX) screamed higher after making a lower low early. That a so-called “outside day” may be viewed as a signal the bulls are coming back to a key ETF that usually moves in the opposite direction as the greenback. (In case you were wondering, TradeStation can spot outside days quicker than you can say “bullish reversal pattern.”)

This all takes place before the European Central Bank’s meeting tomorrow, with a statement due at 7:45 a.m. ET. Pundits may not expect much of change to policy, but traders seem to be looking for some big moves.

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