Due to contract expiration and holiday trading, we often see inexplicable and generally unsustainable trend extensions this time of year. Yet, as liquidity returns after the new year holiday, we can see those trends reverse. A few markets we think could be candidates for the holiday price squeezes followed by dramatic reversals are currencies, Treasuries, and gold, notes Carley Garner, senior commodity market strategist and broker at DeCarley Trading.
Not coincidently, these markets have grown to be either obscenely correlated or unusually uncorrelated and are generally overcrowded. The greenback went parabolic for much of the fourth quarter of 2024. The US dollar index futures contract traded on the ICE Exchange rallied from about 100.00 to 108.00 in a relatively short time.
(Editor’s Note: Carley Garner is speaking at the 2025 MoneyShow Las Vegas, which runs Feb. 17-19. Click HERE to register)
The US dollar deserved to rally because the US economy is far and away surpassing most of its peers, while interest rates in the US remain elevated relative to other major currencies. The rally continued on hopes of more prosperity due to business-friendly policies doled out by the next administration.
However, the so-called “Trump Trade” could already be priced in. Even more concerning to the dollar bulls is that the dollar weakened, not strengthened, during the last Trump Administration.
Algorithmic trades were also carried away with long dollar and short 10-year note futures trades. These markets have settled in the opposite direction a whopping 92% of the time over the last 180 trading sessions.
Similarly, the euro currency futures contract and the 10-year note have settled in the same direction 95% of the time. Extreme correlations such as this are generally a sign of bandwagon trading that often overshoots fundamentals.
The Consensus Bullish Sentiment Index, which polls industry insiders, suggests 74% are bullish on the dollar, and a mere 26% are bullish on the euro. This lopsided reading suggests that most market participants have already taken action.
Most buyers are probably in with the greenback approaching significant technical resistance near 108.00. This leaves the dollar vulnerable to a sharp reversal in early 2025. A sluggish RSI (Relative Strength Index) confirms that the index will likely struggle to hold above 108.00 resistance.
