Currency and commodity markets are having overdue technical countertrend moves after moving a long way in a short period of time. “One-way bets” are over. Price moves in the other direction will be violent given the crowded nature of these trades, but, according to our U.S. investment strategists they will not prove sustainable.
The trade-weighted dollar and crude oil prices exhibit all the signs of major technical extremes. Spot prices are far away from moving averages. Intermediate-term momentum indicators have been stretched for several weeks. Trading sentiment is lopsidedly optimistic on the dollar and equally pessimistic on oil. Speculators are long the dollar, although oil positioning is less clear owing to lack of speculative positioning data for Brent futures prices. Nevertheless, oil market open interest remains high even after the recent bloodbath. Market-positioning extremes on this order of magnitude suggest that these trends are overdue for at least a pause. However, they do not provide insights into whether the underlying trends are reversing.
For the dollar, relative monetary conditions between the U.S. and the rest of the world continue to diverge. Fed hawks and doves still have a mid-2015 rate hike in their sights. In contrast, rate cuts and QE are the default setting in most other developed and emerging countries, with rare exceptions like Brazil. Policymaker attitudes towards their currencies also continue to diverge. Fed officials emphasize the transitory nature of the strong dollar’s impact, while Abenomics in Japan has a weaker yen as an unofficial target.
For oil, prices may not have much more downside, but we expect more volatility than price recovery.