The ‘Dollar Bear’ Trade: Too Obvious?

Can a good technical set-up sometimes be too obvious to work?

While that might be the question of a man whose mojo continues to reside in the possession of Dr. Evil, it’s nevertheless the one that’s percolating in Macro Man’s mind this morning.

Following on from Friday’s rather blah employment data, which were probably a bit worse than expected when all was said and done, it nonetheless appeared as if the reflation trade was soooo on, baby.

Equities rocked and, perhaps just as importantly, the dollar got a kicking worthy of an 80’s-era Doc Marten-wearing football hooligan. The technical damage was considerable, as EUR/USD roared through the 200 day moving average after the London market went home. This level, which topped out the December rally in the pair virtually to the high tick, has been a useful barometer in identifying technical trend reversals and acceleration points.

Even the widely-hated kiwi dollar caught wing, bursting through the 200-day towards the end of last week and accelerating through the highs of the year.

What does it say about the dollar when even the kiwi is kicking its ass?

Such, at least, was the logic on Friday evening. Macro Man ended last week with a modest dollar short against high-beta, technically perky currencies, including the NZD. And while the NZD has indeed performed well so far today, price action elsewhere has left him wondering if all these 200-day breaks are….well….a little too obvious.

For one thing, he expected to awaken this morning to find that Asia had pushed EUR/USD a lot higher. It hadn’t.

Moreoever, if the reflation/dollar going down forever trader were really in force, he wopuld expect some of the best price action to be in the commodity complex; after all, isn’t that where the green shoots should be taking hold the most?

Early last week, copper broke through its 200 day moving average and appeared poised to break through its recent high and accelerate aggressively to the topside. Instead, the good doctor has meandered about, and at the time of writing has sagged back below the 200-day.

Macro Man finds this development to be somewhat worrisome, and not just because he has a small long in copper. One often finds such divergences at tops and bottoms, and so it’s a lit disquieting to see one emerge just as the market is getting convinced that a nice bear run on the dollar is about to begin. Throw in equities approaching the resistance of their yearly highs and credit quietly rolling over this morning, and all of a sudden Macro Man finds himself having doubts about the “obvious” USD bear trade.

So while he clearly reserves the right to get back in, he’s taken the money and run this morning. In a market wherre positioning seems to trump all, the dollar bear trade suddenly looks a lot more crowded than it used to.

Graph: Bloomberg

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