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How to Trade The Overvalued US Dollar
Written by: PaxForex analytics dept - Thursday, 06 September 2018 0 comments
The EURUSD is the most traded currency pair and one thing most can agree on is that the US Dollar is currently overvalued. This is where the agreement ends. According to one analysis conducted by the International Monetary Fund, the US Dollar is trading 11% above its 10-year average (in real effective terms). The OECD concluded that the EURUSD is 15% below purchasing power parity data it calculated which suggests that a rally in this currency pair may be looming. The US Federal Reserve’s own Trade-Weighted Dollar Index is only 4% away from its all-time record high which was recorded in 2002.
Forex traders have plenty of data points which highlight that the US Dollar is overvalued, but some analysts expect the gains to continue. Kit Juckes, Global Strategist at Societe Generale, pointed out that 'There’s more negatives on everything else. The US is a relative stability story. It makes it hard for markets. It’s hard when the thing you want to buy is already expensive.'. This would suggest that forex traders buy the US Dollar not because they believe it is strong, but rather because everything else they look at is weak. This justification for buying assets usually results in heavy losses to traders.
Many may ignore the negative impacts on the US economy, and therefore its currency, from a pro-longed trade war with China. While this threat has driven the US Dollar to the upside amid emerging market turmoil, it is not the type of driving force which yields consistent returns. Once the US consumer is forced to pay more as a direct result of the trade war, US economic figures will follow suit. On the other side of the trade, the situation in emerging markets may be nearing its end phase and the EU is on course to deal with a no-deal Brexit and an uncooperative Italian budget in a much better fashion that currently priced in.
UBS takes a different point of view. The head of Global Emerging Markets Equity Strategy, Geoffrey Dennis, is bearish on the US Dollar and stated that 'Long-term, currencies cannot stay out of equilibrium forever.'. It is important to keep in mind that the current tariffs imposed in the US-China trade war have resulted in capital inflows in the US Dollar, but that the next round of tariffs is very likely to have the opposite effect and result in capital outflows as forex traders account for the negative impact on the US consumer. Here are three forex trades to help you determine how to trade the overvalued US Dollar.
Positive Brexit news announced yesterday dominated trading desks around the globe amid new hopes that a deal will be reached between the EU and the UK. The GBPUSD completed a breakout above its horizontal support area. Adding to bullish sentiment, the primary ascending support level intersected the secondary descending resistance level which is expected to force a breakout above the primary descending resistance level. The GBPUSD is ready to
As the US has negotiated a new trade deal with Mexico, Canada has not yet been included. Despite this development, the Canadian Dollar is anticipated to gain ground against the US Dollar as the drivers which boosted the greenback are ripe for a reversal. The USDCAD surged past its primary descending resistance level, but ran out of steam at its secondary descending resistance level. Forex traders are recommended to seek short entry opportunities near current levels as the USDCAD is anticipated to reverse down into its next horizontal support level which is being enforced by its primary ascending support level.
The Japanese Yen is a safe-have currency and usually attracts forex traders who seek quality and safety. Over the past few months the US Dollar enjoyed capital inflows, but as the trend is expected to reverse the Japanese Yen may become the prime beneficiary. The USDJPY failed to push above its secondary descending resistance level and reversed course. With bearish sentiment on the rise, this currency pair is expected to descend and push below its primary ascending support level as well as below its horizontal support level until it will reach its primary descending resistance level. Forex traders are advised to sell the rallies.