Nice month for the beaten-down sectors! Mega outperformance tends to come at moments of high volatility, sector rotation, and uncertainty. And it certainly has not disappointed post-vaccine
Meanwhile, the energy sector has gone fully mad crazy this year, rising, or falling 30% or more in 3 out of 11 months this year. Now that is on the ups which is the clearest signpost the street thinks a global economic heal is on the way, I have turned bearish on the for a one or two-week horizon. The supply/demand situation is about to turn dramatically in favor of stronger currencies and a weaker USD.
Still, It might be a good time to remind everyone that something that goes up and down 30 % in a repetitive fashion is not necessarily the best asset to chase higher. Anyway, there are likely a few more upside dollars left in the oil market’s tank before this rally fizzles
Everyone talks about how the medium-term outlook for the dollar is about as bearish as one could get. It does not feel like the usual analyst’s lip service either; traders are talking about this. The analog to the 2009 post-GFC recovery remains the obvious historical comparisons. China’s credit creation leading to a V-shaped global recovery triggering reallocation of assets abroad from an overweight US position is about as clear as a whistle sell dollar signal as one could get.
For context, the Bloomberg Dollar Spot Index (BBDXY) dropped 16.5% off the highs in 2009 alone, while the dollar is only 12% off the highs this year despite an arguably worse outlook. The surprisingly high efficacy of vaccines brings forward the timing of the full global recovery and, with it, equity inflows to the rest of the world. Also, the twin deficits have historically led to dollar declines, and the combination of a Yellen Treasury/inflation-targeting Powell reinforces the dollar downtrend.
There has been huge corporate USD demand before Thanksgiving, causing the dollar to rip higher earlier in the week on what is normally a nothing data point for FX markets (i.e., the strong US PMI). Now, the USD demand has been fully stopped up, and there is about to be a torrential downpour of dollar supply for month-end, It is time to pick your favorite short dollar plays.
If I were not “big, short” , I would add more, but I like the long as everyone is talking about it. Plus, it should tag along for a Brexit bounce. I am in at 1.1910, looking for 1.2075 next week with a stop loss at 1.1825, but happy to buy more between 1.1875-1.1910.
I particularly like lower as crude oil is finally following the “vaccines are good for oil” playbook after frustrating the oil bulls for a better part of a week and a half. A daily close below 1.2950 will force the natural sellers of USD/CAD to get active and we could see an extension to 1.2800.
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