Regime shift in the USD - AmpGFX

It is essential to maintain a healthy scepticism in financial markets, especially FX markets, and it would be dangerous to presume that the USD has moved into a sustained uptrend, according to Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

“It does appear, judging by market commentary, that there has been a genuine turn in sentiment that may last for a while and help the USD rise further.”

“We see the potential for a surprisingly rapid move in the USD with little retracement. Capital markets appear to be going through regime shifts that are causing more sustained divergences from fundamentals.  This may reflect a shift to more automated and model-driven trading, and towards index investing.”

“A recent example is the surprisingly stable low vol but rapid rise in equity markets to a peak in January, followed by a regime shift to higher vol choppy trading.  The USD fell precipitously through Dec/Jan, despite rapidly rising US rates and yields.  It subsequently moved into a directionless but choppy pattern for several months.”

“We may be now breaking out of this pattern and could start to trend again with little retracement.  This time reversing some or all of the weak pattern over the last year.  It is possible that this move occurs without the sizeable retracements of recent months, making it hard for investors and traders to enter long USD positions or exit short positions.  With a dearth of USD sellers for fundamental reasons or profit-taking, model and system-driven trading may see the USD rise more rapidly cutting through resistance levels with surprising ease.”

“The USD is now approaching or testing resistance levels (previous lows in 2017 and the earlier base from 2015/2017).  It will be interesting to see if these prove to halt the USD advance much.  I suspect that we may see only a minor pause with little retracement.”