Is The Long Dollar Trade Over?

Submitted by Derrick Wulf of No Easy Trade

Is The Long Dollar Trade Over?

It seemed almost too obvious. The European Central Bank was imposing negative interest rates and devising new quantitative easing schemes to combat the growing threat of deflation; the SNB was buying foreign currencies in "unlimited quantities" to cap the value of the Franc; the Bank of Japan was madly printing Yen in a desperate frenzy to finally stir up domestic demand; and then the Bank of China responded with its own rate cuts. All this, while the Federal Reserve was quietly ending its quantitative easing policies and even hinting at forthcoming (2015) rate hikes.

The long dollar trade, and all it's various expressions, soon became one of the most crowded trades of 2014. Investors were not only long the dollar against euro and yen, they were short gold, silver, copper, and commodities in general, even using the dollar to help justify late-cycle crude oil shorts in recent weeks. Investors were also long stocks, as all these freshly printed euro, franc, and yen would inevitably seek out "greener" pastures abroad.

But the dollar rally has started to lose momentum, and with year-end approaching it might not be surprising to see some investors take a bit of risk off their books. Many of these investors still have decent profits in their long dollar expressions, but the huge reversals in gold and silver yesterday may provide a bit of a warning to those still in the trade. Moreover, with liquidity in the financial markets a mere shadow of what it used to be, waiting until Christmas to trim positions might not be the most prudent strategy for institutional managers. This turkey is cooked, and it's time to give thanks.

Now a few charts. First the dollar index, which looks like it's finishing a classic wave 5 rally on waning momentum and notable RSI divergence (Chart 1). Do we really want to get greedy here?

Now Gold, which staged a 70 point reversal yesterday to pivot back above 1180 and squeeze out a few late shorts along the way (Chart 2).

And the S&P 500, which once again failed at trend resistance after becoming classically overbought on both daily and weekly timeframes (Chart 3).

Like my Mom used to always say, "profits are made and players get played when smart traders fade the most popular trade." In the near term, it may in fact be more about positioning than macro events, and as of right now, it seems that getting on the other side of the dollar might actually be a decent way to earn a few more of them.