I bet you found yourself being a bit early on the market on a few occasions. This can be very risky, because there’s a thin line between being early and being wrong. Having a sound risk management one can prevent losing (too much) money, however one must remember that there are two dimensions of a good trade, time and direction. If either of them is wrong, you risk losing money! Thus I don’t trade on my macro views until the tape confirms them.
I wrote a post Euro to repeat 2017 move? three months ago. Clearly I was early, but now it looks US dollar is finally breaking down, thus confirming euro and other currencies could appreciate versus the dollar.
Let me start with a monthly chart of Trade Weighted US Dollar Index of major currencies by FRED. The broad index looks more bullish too be fair, but it does not offer that much history, so below I will show you an equally weighted index against emerging market currencies too.
We can see that the index is starting to roll lower from a major resistance level and a rising wedge formation with a waning upside momentum. Not to mention that a few weeks ago Bank of America Merrill Lynch said the most crowded trade is long USD and COT data is confirming this to some extent. If all these people are forced to unwind their positions…
Now, here is an equally weighted USD index against Chinese Yuan, Brazilian Real, Russian Ruble, Indian Rupee, Mexican Peso and South African Rand. I’ve normalized all pairs against the price on the 3rd of Jan 2000.
Clearly USD is performing much much better against these currencies and they’re making the broad index look much better compared to the index against major currencies. I might be just feeding my biases here, but I’d argue that until this index is below 11.50-12.00 we must err on the short side.
If you’re going to short the dollar, you clearly want to do it against the developed currencies such as yen or euro.
You can be eurosceptic all you want, but until EURUSD is above 1.15 go find someone else to sell your negative views. If the euro falls below 1.13-1.15 then we can have a chat; we’ll also have to revise the bullish thesis.
And here is also the strongest currency in the emerging countries camp, USDCNY.
If you’re still bullish this pair after looking at this chart then I just don’t know anymore.