Contrarian Mode: Time to Buy the Dollar?

If you paid any attention to the financial markets last week instead of dusting up your opponents in Minecraft, then you would have noticed that Treasury bonds rose last week. 10-year notes fell to a record low yield of just 2.0346%. Remember, bonds prices are inversely correlated to interest rates (yields). If yields are falling, then bond prices rise, and vice versa if they are rising.

With the Volatility Index (VIX) spiking to as high as 48 after being stuck in range between 15 and 20 the previous three months, investors sought the safety of Treasury bonds, which is why prices rose.

That’s right folks- even with all the hullabaloo about the U.S. debt downgrade a couple weeks back, investors still want their hands on U.S. government notes! This indicates to us that in times of despair, Treasuries still contain that allure of safety, no matter what some rating agencies may believe.

Moreover, a look at the most recent Commitment of Traders report reveals that futures traders are dialing down their short dollar bets. Word on the street is that the aggregate total of short dollar bets against the other 7 majors and the Mexican peso fell by 154,105 contracts week, the biggest drop since the CFTC began compiling this data.

Digging a little deeper, we can see that the net positions for the franc and Australian dollar are down to long 4,655 and 29,016, down from the 21,119 and 60,015 figures we saw as recently as June 3. In addition, looking at Euro contracts, we can see that future traders are actually net short the euro by 8,273 contracts!

This ongoing trend means that traders are actually are beginning to limit their exposure to other currencies and are becoming less bearish on the dollar.

What do all these mean for the forex market, particularly for the good ole U.S. dollar? A quick glance at the weekly chart of the U.S. dollar index might help:

USDX Weekly Chart

As you can see, the U.S. dollar index is currently treading closer and closer to its 2008 levels. During the third quarter of that year, just before the onset of the financial crisis, USDX found support around the 72.00 level.

When the global recession broke out after that period, the USDX jumped like crazy and reached the 89.00 level in a span of five months. Of course, as we all learned in the School of Pipsology, the dollar index is the weighted average of a basket of other currencies against the U.S. dollar. I can only imagine how many pips these other currencies lost to the U.S. dollar back then!

Thanks to the ongoing European and U.S. debt problems, risk aversion continues to loom like a dark cloud over the markets. In fact, as I showed you in my latest infographic, current market conditions are starting to resemble that of pre-recession 2008.

Amidst all this uncertainty, the U.S. dollar still seems to be the king of safe-haven currencies. Traders are wary to put their money in the Japanese yen or the Swiss franc because the BOJ and SNB have been stepping up their efforts to keep their respective currencies from appreciating. With that, do you agree that the U.S. dollar has reached a bottom?



  • Jose Avelino

    q les parece???

  • MikeH

    I’m a huge fan of gold.  However I’m plain short EUR/USD. Expecting to hit 1.36 – 1.35’s. The reasons: Well, the US economy is based on consumerism. July, August and September maybe sluggish but, as soon as the holidays start to pickup, USD will probably start to pick up some steam. With this in mind, SNB and BOJ as Pipponomics stated, they’ll keep themselves busy as much as they can to stop their currencies from appreciating further. EURO on the other hand, as we all know, is just so unfavorable at the moment, besides their ‘BONDS’ and what nots?

    I sold three lots around 1.4300 with a stop around 1.4800

    TP 1: 1.4000
    TP 2: 1.3700
    TP 3: 1.3500 (Maybe I’ll close around half way through, HOPE SO).

    Have fun trading fellow traders.

  • Moraru Cosmin

    N/A

  • Ilya Gruntal

    Very solid view of things you got there. It rings the bell.
    Dunno about Yen, but if you look at USD/CHF weekly, u’ll see we’ve a got a hammer last week, and after that we gapped up, now we closed the gap, time to buy imo.

    If you take a look at months chart, u’ll see it’s being too oversold, so the candle signals mean a lot now + we’ve got fundamentals about bank of chfs are taking three-months measures to weaken their currency.

    Wish you good trades and let you be at the right side of the market.

  • Xavi

    I think it all depends on US jobs and growth, besides being bullish after the FED said it wont raise rates for 2 years is crazy IMHO, the only reason the Greenback would rise is risk aversion.

  • Moraru Cosmin

    all your ideas are nice and funny …but there is another factor no one at babypips.com is taking into account …

    the HUUGE (and ever growing…) impact of high frequency automated trading systems ….err…thats forex robots, to put it simply. 

    some firms, with the big bucks, have machines which costed the same as the PIBs of a smaller country, but trade profitably BILLIONS time per SECOND! 

    thats a huge cause behind the market volatility lately, aand also why Sarkozy & Merkel want to institute a Tobin tax

    but it ll be useless… 
    and you know what they say —> if you cant beat them, join them! 

    i d love to know that the human factor primes …analysis, discussions, brain storming, chart analysis and all that 

    but truth be told …human factor in forex transactions is fast approaching obsolenscence!

    we simply cant do billions trade/ sec, billions analysis/ sec etc etc

    so now, i m learning to create my own automated trading system, to trade loads of time/ sec as well, so the human factor is removed from ecuation

  • Matthew Espina

    I bought the dollar in a trade last night, going off yesterday’s euro bounce, but my target’s only 140 pips away at 1.4300 (EUR/USD).

    I agree that the dollar should be bought, and most definitely against the euro, but I’m still cautious about seeing a long-term trend reversal. There’s just too much institutional weight behind the dollar’s fairly steady decline over several decades for me to put too much money on it. I wouldn’t feel confident about being largely dollar bullish unless we hit another recession, and the risk-aversion switch gets firmly locked in the OFF position (which of course may happen).

    Thank you for highlighting the market sentiment and technical aspects that would predict a dollar rally. It’s always a pleasure to read your entries, especially when you have contrarian views.

    • Moraru Cosmin

      all your ideas are nice and funny …but there is another factor no one at babypips.com is taking into account …

      the HUUGE (and ever growing…) impact of high frequency automated trading systems ….err…thats forex robots, to put it simply. 

      some firms, with the big bucks, have machines which costed the same as the PIBs of a smaller country, but trade profitably BILLIONS time per SECOND! 

      thats a huge cause behind the market volatility lately, aand also why Sarkozy & Merkel want to institute a Tobin tax

      but it ll be useless… 
      and you know what they say —> if you cant beat them, join them! 

      i d love to know that the human factor primes …analysis, discussions, brain storming, chart analysis and all that 

      but truth be told …human factor in forex transactions is fast approaching obsolenscence!

      we simply cant do billions trade/ sec, billions analysis/ sec etc etc