The American dollar gained recently across the board, despite sellers stepping in at every new high. The AUDUSD pair, for example, one of the strongest in 2020 and so far in 2021, fell over three big figures from 0.88 to 0.7620 in just a few days. EURUSD did the same, and most of the FX dashboard showed similar price action.
One explanation for the greenback’s strength came from the rising yields in the United States. When long-term yields are rising, investors rush out of the equities, and that triggered a move higher in the dollar. At least, that was the initial thought – when the Nasdaq 100 index dropped from its highs in two consecutive days over a week ago; it triggered a move lower in EURUSD from 1.2240 and AUDUSD from 0.80. In just a matter of a few days, the U.S. dollar made victims across the board.
However, stocks bounced back. Dow Jones made two consecutive all-time highs in the meantime, and Nasdaq’s rally from yesterday is sweet revenge for bulls trapped at the previous highs. Yet, the dollar did not give up its gains. It barely corrected, signaling another decoupling from the way markets function.
Speculative Short USD Positions Reached Extreme Levels in 2021
At the end of 2020 and the start of the new year, the short exposure on the U.S. dollar reached extreme levels. Everyone and their mothers were short the American dollar, as revealed by the huge market consensus in December 2020. As such, it should not surprise anyone that the short exposure exceeded two standard deviations from neutrality, triggering signals of a sharp bounce.
The last time when the U.S. dollar was sold so aggressively, the dollar index bounced dramatically. Will the current move mark a similar reaction?
How about the recent $1.9 trillion fiscal stimulus that is about to be deployed in the U.S. economy? It should trigger another sharp selloff in the dollar, at least if we use conventional wisdom.
Still, the job numbers last Friday present a different optic. With vaccines rolling out, hospitalizations down, rates picking up, and a dropping unemployment rate, it is difficult to make a case for a lower dollar. Not to mention inflation – the core inflation is still down at comfortable levels.
Later today, the Core CPI (i.e., core inflation) is expected at 0.2% on a monthly basis. It may be just the data we need to see if the recent trend in the dollar is the start of a larger move or just a correction.