Love And Hate In The Currency Markets

A Lopsided Picture

As is well known, the US dollar has been the king of the hill in currency land over the past two years or so. Readers are probably well aware of the reasons: the US economy is considered to be doing best among world economies, the Fed is expected to soon hike rates from nothing to almost nothing and economic areas that are large exporters of commodities have seen their income from this sector shrink dramatically.

Image credit: lachaert & d’hanis

And yet, at some point one would expect all of this to be more or less priced in. Funny enough, history suggests that once expected rate hikes are actually implemented, the US dollar is often in the final stretch of an advance. Apparently the currency markets are discounting future Fed policy with quite a long lead time. As one would expect, the dollar continues to get a lot of love from speculators and investors, while commodity currencies are at the moment hated with a passion.

Without further ado, here is a comparison chart showing the optimism indexes of several important currencies (similar to the commodity “Optixes” we showed in our gold update yesterday, sentimentrader calculates these by averaging the results of the most important sentiment surveys as well as including positioning data from futures and options markets).

Currencies ranked by the bullish consensus – only 12%, resp- 13% bulls remain in the Canadian and Australian dollar – quintessential “commodity currencies” – while the US dollar enjoys a bullish majority of 75%.

Naturally, the chart of the dollar index looks quite good, while the loonie and the Oz peso look rather weak. The charts of these currencies follow below:

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US dollar index, daily – this is still a bullish looking chart…for now, anyway

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The Canadian dollar, daily – dragged down by oil prices and loose monetary policy

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The Australian dollar daily – also sinking due to falling commodity prices and loose monetary policy by the RBA

Conclusion

Currency trends tend to be very persistent, so one cannot conclude that these trends will reverse based on sentiment and positioning data alone. However, over the next quarter or two, the “pain trade” would surely consist of a rebound in commodity prices and the associated currencies and a concomitant decline in the US dollar.

Charts by: StockCharts, SentimenTrader