The heavily-shorted US dollar is in the midst of a massive rally in the mid-week London Session as the Carry Trade theme takes a back seat to the Greenback. It appears as though market players are caught on the wrong side of an overloaded trade, fueling a short-squeeze in recently wounded currency pairs. In very directional price action, the mighty Euro has taken a precipitous fall on above-average volume.

Meanwhile, the unwanted USDCHF has rocketed about 120 pips, while USDCAD touches parity. The moves of the day are obviously counter-trend, but the well-known market positioning and psychology beg the simple question: Over the near term, have the US dollar bears exhausted all of their ammunition?

The story is simple and the consequences notable. For the first session in recent memory, the USD is sustaining a meaningful rally at the expense of Euro. The currency pair in focus has obviously been EURUSD, which opened European trading north of 1.4800. Aggressive selling started on the break of 1.4805 and continued down to a low around 1.4725. GBPUSD initially followed, but found excellent support in the 2.0600 zone, consequently crushing EURGBP by about 30 pips from 0.7180. AUD and NZD did not participate in the non-USD fall, but instead held their ground with EURJPY, in what may be viewed as a Carry Trade play.

The winners thus far have predictably been USDJPY, USDCHF, and (anecdotally) USDCAD. Both the Japanese Yen and Swiss Franc saw meaningful reversals versus the USD, with each pair ascending over 100 points each. The moves were likely a combination of profit-taking, short-squeezes, and momentum traders hopping on the bandwagon. Any way you view it, the price movement has been constructive. It will be critical for these gains to hold in the coming New York Session.

To reiterate, there are many signs in the global market pointing to a reversal in the US dollar. Equity markets and commodities are off their highs. Emerging markets are faltering, led by the Chinese equity market. Bears will argue that coming Fed cuts due to recession fears will be a structural obstacle to the progress of the Greenback. For the first time in months, it appears as though there is an argument for either side… and that’s what makes a market.

Upcoming Economic Data Releases (New York Session)

  • 0830 EDT Oct Durable Goods Orders, consensus: -0.1% (relevance: medium)
  • 0830 EDT Oct Durable Goods Orders ex. Transportation, consensus: +0.3% (relevance: medium)
  • 1000 EDT US Oct Existing Home Sales, consensus: 5.00m, -0.8% (relevance: low)