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Is A Dollar Short Squeeze Imminent?
Goldman FX, whose core thesis over the past quarter has been an increase in USD weakness, and which has so far proven correct against most pairs (and certainly gold) except for the EUR, which is in the same boat as the dollar (and both are sinking fast after hitting an iceberg), looks at the risk of upside dangers to the USD, which would likely materialize in the event of a global Risk Off event, and finds that the currencies most exposed to a surge in the USD are the Yen, once upon a time the carry funding currency and now the opposite, the AUD and the NZD. That said, Goldman concludes "beyond the risk of a short squeeze near term, our expectation is for USD to continue weakening on a broad basis." Naturally, Goldman's thesis will be very facilitated should Bernanke go ahead and make QE3, in some form, a reality as soon as the end of August.... just like last year.
On the short squeeze?
Short-term risk of USD short squeeze greatest against JPY, AUD and NZD
FX positioning is an elusive beast. There are few comprehensive data sources to get a handle on positioning, and what sources there are come with big handicaps. One source for positioning is the weekly CFTC Commitment of Traders report, which captures one particular subset of the FX market. For the eight currencies in this report (and for the overall USD position) we have developed positioning scores that are scaled between +/-10, with a negative reading indicating a short USD position. These scores go beyond the raw CFTC data by controlling for the interest differential as one important driver of positioning. We put out this score every week upon release of the latest data (CFTC Commitment of Traders Report (July 26, 2011) – Overall USD short position builds again).
Our overall positioning score for USD as of July 26 (the latest available data) was -5.9, which is the most negative (indicating a net USD short position across the eight currencies in this report) this positioning score has been since early June. In the scheme of things, this score is not yet that extreme – it averaged -8.3 as recently as March after all. But our overall USD positioning score paints a somewhat misleading picture here, as some currencies are now seeing much more stretched positions against USD than back in March.
In particular, short USD positioning in March was heavily concentrated in EUR. Our positioning score averaged +7.0 that month (meaning significantly long EUR positioning against USD once controlling for the interest differential). In contrast, our positioning score for EUR is now +0.1, indicating essentially flat positioning. Meanwhile, whereas our positioning score against JPY averaged +2.3 in March, it reached +7.3 in the CFTC report for July 26 (where a positive score means long JPY / short USD positioning). The picture is similar for AUD, where our positioning score averaged +5.0 in March, but was +7.4 in the most recent data. The same is also true for NZD, where our positioning score has changed sign from March, swinging from -7.7 to +8.3 now.
The picture is thus that – underlying a moderate-looking overall USD short position – short USD positioning has reached extreme levels against JPY, AUD and NZD, making these currencies most vulnerable to a USD short squeeze should risk appetite deteriorate meaningfully. Short USD positioning against EUR looks to be relatively flat.
One key ancillary consideration is what happens to the US rating and its impact on the USD:
Yesterday’s progress on raising the US debt ceiling notwithstanding, it remains unclear if the final agreement (passed by Congress hopefully later today) will be enough to avert a downgrade over the next year. In a US Daily last week, Alec Phillips and Andrew Tilton (Potential Consequences of a Downgrade of the US Sovereign Rating) drew some cautious conclusions on the potential market impact of such a downgrade. They examined three historical episodes: (i) Japan in the 1998-2001 period, a relatively good basis for comparison because of the size of the economy and debt market; (ii) Spain, which was downgraded by S&P in 1998 and then again (after being upgraded in the interim) in 2009; and (iii) Canada, which was downgraded by Moody’s in June 1994.
Phillips and Tilton note that in the event of a downgrade for the US, it would not be surprising to see: (i) a modest drop in equity markets, with risk of a further drift downward over the next month; (ii) a weakening of the dollar by as much as a few percent; (iii) steepening of the yield curve and a further cheapening of Treasuries to OIS; and (iv) some weakness in the financials sector, as AAA-rated insurers would face immediate ratings consequences.
In today’s Daily, we dig a little more into the possible ramifications of a downgrade for USD. In particular, we very much agree with the conclusion that the dollar could weaken further. Indeed, as we reiterate below, fiscal policy concerns are central to our forecast for further broad USD weakness, as we outlined in our most recent FX monthly (July 2011 - The EUR/$ Nexus of Fiscal Concerns). That said, there is evidence of short USD positioning in FX markets. Therefore there is a risk of a USD short squeeze in the event of faltering risk appetite on US fiscal developments or, as was the case yesterday, disappointing data. We assess here where in FX the risks principally lie in such a circumstance.
All that said, Goldman says much more dollar weakness is coming.
Our forecast is for more broad USD weakness ahead
Beyond the risk of a short squeeze near term, our expectation is for USD to continue weakening on a broad basis. Indeed, our forecasts imply that USD TWI will weaken another 4.3% over the next 12 months from here. Although our forecast for EUR/$ of 1.55 one year from now tends to attract a lot of attention, this only implies a 1.4% appreciation over this period for EUR TWI, i.e. our EUR/$ forecast should be seen as part and parcel of broad USD weakness (as opposed to a strong statement on EUR itself).
That said, with fiscal headwinds buffeting both Europe and the US, we devoted the most recent FX monthly to this issue, examining the transmission channels from fiscal policy into FX in the Euro zone and the US. Conceptually, the transmission channels can be split into the cyclical impact from fiscal policy and risk premia linked to debt levels. In the Euro-zone, the risks are more skewed towards high debt levels in a few countries, and hence sudden changes in the risk premium. In the US, the cyclical outlook has been the dominant transmission channel, a point also made by Dominic Wilson in yesterday’s Daily (Debt Ceiling Endgame as Market Prices Growth Risk). Taking into account the large external funding needs of the US (as opposed to the Euro zone), this suggests a more gradual but also more persistent depreciation for USD. Overall, we continue to believe that fiscal issues will, at the margin, remain a more Dollar-negative factor even beyond any near-term resolution to the debt ceiling debate.
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Rand Paul is killing it in the Senate.
Retired Judge says "Super Congress" completely UNconstitutional.
http://www.youtube.com/watch?v=91QEIenOeY0
Since when has the Constitution ever stopped this government from doing what they want or redistributing your money to the ultra-wealthy.
Congress is a bunch of mouthbreathers.
A super congress is unconstitutional,but that doesn't mean they won't get away with it. With the current structure of the supreme court they probably will. Funny how thw msm is quiet on that part of the legislation.
Dollar and PM short squeeze taking place since this morning. It does not take Goldman to see that...
Holding US Dollars is the biggest RISK of all. These bankers want you to believe that the dollar is somehow a safe haven. Bullshit.
It has already proven that in the event of a global risk-off event the USD is indeed a safe haven, 2008. Therefore the premise of the above argument is very valid as all evidence is pointing to another RO event just around the corner.
The bounce may be shallow because from a global perspective Brazil and China are looking attractive on the rebound but still hot money will flow into the best of the worst.
Great article thanks again gang for posting the goods from Goldman!
In the long run you are right. But in the short run (the only thing that matters on Wall Street and in Washington), the dollar is going to jump just like it did in 2008.
The double-dip of this Depression is becoming obvious. The stock market will eventually notice. When that happens, people are going to sell stocks and run to cash. With Europe getting in more and more trouble, this is going to become obvious.
Gold, in the short run, is going to correct. In the long run, gold has nowhere to go but up.
I think the dollar is already pricing in Greater Depression II. There won't be a dollar rally because that is what everyone expects now. Instead, we will have an immediate reaction to GD2 with QE3, which results in the USDX dropping below 70 and gold over $2k. There's no shortage of dollars when the Fed can print up $800 billion overnight.
Back in the day, Hildebrandt said that the currency was going to fi'ty cent. Everyone assumed he was talking about the Euro but they were wrong. He was referencing the USD/CHF pair.
In the meantime, I'll wait. Got a Topsy-Turvy for my tomatoes, which sucks, by the way. It's just not natural.
:D
Mr market continues running to the dollar until gold is viewed as a safer asset.
The day will come when commodities will be settled in gold futures
nowadays the dollar is backed not by gold, but by macbook pro. what is there not to love?
/sarc
http://azizonomics.com/2011/08/02/foreign-policy-apple-acts-like-the-chi...
Goldman gives good analysis. They care about YOU.
Ha !!! T HE Y c a r e about t he ir M O N I E !!!
Wow, I thought I was on Facebook/Huffpo for a second with that retarded typing style.
Then sit back and log the fuck off. Come back when you know where you are.
Or just type like an adult instead of some double-digit IQ'd, tween twat on Huffpo?
You are a waste of time and space here. Take a few days off and come back when you are ready to fight like an adult.
Stick your head up your ass and fight for air, internet tough guy.
Boys boys can't we all just get along? I know fight club is the theme but you're fighting the wrong people.
I have never read whateverthefuck before and it is a total d bag.
You come out and act like Papa Smurf, talking like it is some big deal for some one to use a few caps and spaces in a sentance, call me out onto the mat for no fucking reason, and now you are continuing with the name calling, and you try to put everything on me when YOU STARTED the most uncalled for fight here.
Why the yfuck do you care if someone types like that? You are the tough guy, calling somone out like that. Stay the fuck on topic, or get the fuck out of here. We do not need you. You think we need you to come out and write, 'Oh hey, I know best, and your writing style is going to be a problem, so shape up or I am going to write you a ticket." Go eat a donut Mr Cop.
Then you get all pissy when I come back at you like a ninny caught with your pants down. You are a total duchebag. Get fucked.
Iriestx does it because it's his nature. He's a dickhead.
If there is a sell of in stocks would the dollar index not increase?
Yes. And it will. Selling the dollar down for the purpose of enhancing the earnings of international companies is the Street's primary strategy. And I think it is a one page playbook at this point in the Ponziholic huddle.
"Short the dollar, buy the Roach Motel [SPY]. Ready...break!"
SSDD. They predict it will go up, and down. One way or another they will be right.
Useless, chicken-shit, but profitable prognostication.
USD can't go much lower. Japan central bank seems to intervene @ .76-.77 level. If the USD goes lower, it'll bust the Japanese Central Bank.
Also, if the USD-JPY pair does go to .75, Japanese econonmy will stagnate, and possibly deflate, and the sovereign debt default wolf-pack may target it, after it preys on the UK.
USD can't go much lower. Japan central bank seems to intervene @ .76-.77 level. If the USD goes lower, it'll bust the Japanese Central Bank.
Also, if the USD-JPY pair does go to .75, Japanese econonmy will stagnate, and possibly deflate, and the sovereign debt default wolf-pack may target it, after it preys on the UK.
I wonder why nobody talks about a short squeeze in CHF/USD?
The Swiss are really fucked at this rate, there is some major chin-stroking going on in the SNB, either buyers start coming into EUR/CHF or we are going to see some major fireworks, its already fell close to a big figure in under seven sessions hence if it continues we will see parity next week!, they will just have to intervene, well either that or start dishing out serious subsidies to businesses...im not too sure what effect that will have on the currency, but at least they wont be gambling - and at CHF 20bil a throw, they would do well to consider it.
The CHF is one of the most overvalued currencies out there. Under these circumstances interventions might be a little more successful...
Believe, it's all in the plan. Wait for the double over the buck, then go all in.
:D
Won't they have to ramp the dollar in order to piano wire the life out of rbob, tank stwacks and prime the msm pump for round 3 of QE ? Just like the ole 3 strikes and your out rule in bball, it will be on that flight to safety tbond surge that I'll start rachetting into TBT. Watch your leverage if you've allready started front running a weak bond market... or so I'm thinking.
The coming dollar rally may be a massive one::
http://markettechnicals-jonak.blogspot.com/
Europe will soon start with a 2 trillion euro "emergency pot" to.
They'll have to bailout Spain and Italy anyway.
WHY WILL THEY DO IT? : EVERY TIME AMERICA DID A QE, EUROPE DID SOMETHING JUST LIKE, AND ABOUT THE SAME SIZE
There'll be a lot of media covering also like you're debt target deal to.
and after 2 to 4 months of hard negotiations, it will pass.
Europe has always done whatever America does. Only a few months later.
Just try to look surprised when they start to talk about it. And the outcome... you'll never would have guessed it.
they are stupid. the daily macd is going down, so yu plot the channel and trade it, which means buying uup on the dips. for max gain trade the hourly.
Glad to hear Im not the only one who is short on dollars.
they need to match the NEGATIVE interest rates with a worthless dollar. That's called perfect symmetry.
USO biyatchez!
I had been looking for a short sqeeze in the near term to buy more gold. Now that I'm on the same side of the trade as Goldman I need to rethink my plans.
Dollar up gold down: the old gray mare...
In the market "history always repeats itself" J. Livermore
DXY is low and austerity is good for the dollar. I would look for at least a near term move up in the dollar.
? does the FED have more ink for his printer ?
Well then shorts will be destroyed, coming to a chart near you in less than 24 hours after the super committee Law is passed! SUCKERZ!
Is A Dollar Short Squeeze Imminent?
Next 24 hr yes. Longer term no.
Trading this market short term is insanity ...unless you're one of the big players.
DXY has been a rollercoaster last few days. Big players moving it up and down making money each way. Mini pump-&-dumps. Standard procedure.
But longer term USD continues trending down. Especially when QE3 starts.
Short term trading keeps you in a short term view. You see individual trees but you don't see the forest, the big picture.
I would trade FX if I could do it on a longer term basis. But no, not short term.
Actually I can trade FX longer term. PMs. That's how. And longer term they're doing pretty well.
If I had known QE would be used to pump stocks up, AAPL would have been a good longer term trade. But who knew?
After reading thru all these pros and cons about the FRN, I know even less than I did before I read them.
Isn't there any among you who are omniscient, and can tell me for sure whether to sell the dollar and buy and buy the Bovespa, CAC, DAX, or the S & P or sell the TOR and buy the Loonie??
What's the point if everyone just has an opinion and no reliable, solid inside information to trade with like our CONgress Peeps can?
Are you looking for realiable money making advice for free? Then run for congress.
My long term indicators still warn of a USD rally and EURUSD weakness.
http://stockmarket618.wordpress.com
My long term indicators still warn of a USD rally and EURUSD weakness.
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