US Dollar Might not be what it Seems

The risk in being a US dollar bull at the moment is that the trade is more crowded than it appears. On Wednesday, the New Zealand dollar and yen were the top performers in another sign of how correlations are frayed; USD and GBP lagged. The BOJ meeting summary later will be telling. A new trade was added to the Premium Insights in an FX pair, which was last entered 10 months ago. The trade is backed by 3 supporting charts.

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The US dollar retraced some of its recent gains on Wednesday but not enough to seriously jeopardize the dollar-bounce theme. The news on the day focused on oil because of a surprise draw in US supplies that sent crude quickly higher and CAD along with it.

The past week was instructive in terms of broader market sentiment. Waves of economists and research analysts have been quick to jump back on the US dollar bandwagon. When we look at US dollar positioning in something like the CFTC report, it shows heavy bets against the dollar but listening to commentary, there is either a tremendous wave of money on the sidelines waiting to come in or those numbers don't truly reflect market positioning.

What's striking is how quickly the commentary has shifted. USD/JPY fell 2000 pips then bounced 300 and Goldman Sachs has already called the bottom.

No one likes to be in a crowded trade and the constant battle is to stay ahead. Obvious is obviously wrong. There is a quiet consensus that the US dollar will resume its climb as the Fed perks up and plenty of indicators point in that direction.

The deeper theme in markets is a new uncertainty. There are no correlations and all the themes are weak. It's not a question of dovish and hawkish central banks; it's a matter of dovish and more dovish. It's not a question of good growth or bad growth; it's a question of bad growth or not-as-bad growth.

Comparatively the differences and divergences are small; that makes flows and ever-changing sentiment more important than the big themes; at least until a central bank can recapture the imagination of the market.

The prime candidate at the moment is the Bank of Japan. The 'Summary of Opinions' of the most-recent meeting is due at 2350 GMT. The minutes aren't due for another six weeks but this report could offer some critical insight on the question of when (not if) the BOJ plans to add more stimulus. The idea that the April 28 non-decision was merely a pause could be a powerful idea and bullish for USD/JPY.