The nominal trade-weighted dollar index, against major currencies, is now just 4% higher year-over-year as the index has recently fallen from an approximately 13-year high of 95.6 to 92.4. The slow down in the rate of change is important since at one point in 2015 the nominal trade-weighted dollar index was increasing at a 22% year-over-year pace. While we still think its early to call the end of the dollar bull market that has been in place since July 2011, its apparent that the world is currently not in as broad of a dollar bull market as we were in last year.
Looking at the latest commitment of traders data (2/19/16), it seems that we may be about to enter a period where the euro and the yen both strengthen, perhaps significantly, against the dollar. While the net commercial position is still net long the USD/Euro exchange rate, its currently at its least bullish configuration since June 2014. This implies that that we may see a much stronger euro, possibly to the tune of 10-20% higher, in the relatively near future. The net commercial position was net long the most contracts ever, going back to 2000, in April 2015 which was just two weeks after the euro reached its lowest level against the dollar in over a decade. We have since seen the net commercial position reduce its bullish stance and the euro strengthen by about 6%.
The yen has already strengthened by 10% against the dollar since June 2015. The latest commitment of traders data shows that the net commercial position is short the dollar against the yen by over 50,000 contracts. Back in 2011, when the net commercial position was this short the yen was trading below 80. While we aren’t forecasting a waterfall 30% decline of the dollar against the yen, it does seem that a further strengthening in the yen is more probable than any other outcome at the moment.