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Andreas Zanin
Analysis | December 18, 2020

Trading In the Holiday Period and USD at Key Level

Many traders at this time of year will start to wind down their trading and re-start in the New Year which in our view is a mistake as December historically is normally a good month to trade…

The period between the 15th December – 15th of January is normally a very volatile period with many big trend changes unfolding and high volatility. If you are a position trader, it’s a good time to focus on the market and one trade to look out for is the USD to rally after its recent sharp sell-off. The DXY which measures the USD Against a basket of currencies is down 1% for the week so far and has fallen 12.6% from a three-year peak in March.

The consensus view is for the USD to fall further with over 80% of forecasters in a recent poll by Reuters seeing USD weakness continuing through the first quarter of 2021. While the big trend is down, we think the odds are high in terms of a significant bounce in the USD before further weakness as the short trade now is very crowded:

“The dollar took a breather on Friday after enduring a week-long beating that has pushed it below major support levels as its slide sucked in more short sellers keen to make an easy buck.” (Reuters)

We have seen many speculators sell this week and in terms of big money, we have hedge funds now holding one of their biggest short positions ever and asset managers on the CFTC Net traders’ positions holding their biggest short position since records began.

A large number of shorts were added after the Fed. The market was looking for the Fed to increase QE which they didn’t, and they also upgraded their economic forecasts but the USD sold off with many commentators saying the Fed will probably increase QE in the near future anyway. This action is common in a bullish or bearish extreme where the market anticipates an event that has not happened. George Soros’s “Theory of Reflexivity” covers anticipation of an event by the crowd as a way to get trades with low risk and a high reward.

What news event could turn the USD? No specific event is needed with a crowded short trade – why? Because with many short trades entering at low levels with close stops, all you need is a drop in volume and a small number of buy orders to hit the short traders’ stops.

In terms of the USD, we are now going to see volumes start to thin out as the holiday season begins and, in our view,, the odds are high that short traders’ stops could be hit. The media of course will then fit a story after the event has taken place. The USD has been weak the majority see no end in sight to its weakness and that’s a warning you could get a significant short-covering rally.

We will cover some individual currency pairs next week but below you can see the DXY which is trying to break down and away from a major support level on the monthly chart below. Of course, we could see lower prices, but we think the odds now favour looking for a bounce in the USD.

DXY MONTHLY CHART: The DXY is trading at the 90.00 level after a sharp selloff but weakness from here looks limited (as it was back in 2019) A move up from the 90.00 level in our view should target at least the monthly high at 92.00 but due to the oversold condition we could run up to 94.00 or 95.00.

 

Research provided by LearnCurrencyTradingOnline.com

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