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US Dollar Sentiment: Contrarian Bullish at Trader’s Narrative

US Dollar Sentiment: Contrarian Bullish

Earlier in this month’s sentiment overview, I mentioned a lesser known sentiment indicator called the “Daily Sentiment Index” (DSI). It is compiled and disseminated by Jake Bernstein’s firm through various “proprietary data collection methods” which include internet, telephone and/or email.

Since the objective is to arrive at a contrarian signal, pains are taken to only access retail traders and investors and to avoid professional traders. Also according to Bernstein, they do their best to survey the same base as much as possible. The resulting data is available daily on major global indices and commodities without lag by 4pm the same day. Overall, it has proven itself to be a very good contrarian measure.

Here is a recent chart of the US Dollar index along with its DSI:

US Dollar Index and DSI sentiment chart

Similar to other, more well known sentiment indicators (such as the AAII weekly sentiment survey), a simple question is asked: are you bullish, bearish or have no opinion. But unlike the AAII survey, the DSI is a considered ‘a proprietary indicator’ and there is no detailed disclosure of its exact nature or methodology. While you might think this opacity would make people reluctant to rely on it, the DSI has a large and loyal following, especially among the institutional crowd who don’t balk at paying almost $2,000 a year for a subscription. You can get more information on the DSI at Bernstein’s website.

For some perspective, here’s a very long term chart of the US Dollar Index with the two extreme lows in sentiment:

US Dollar Index long term chart Aug 2009

Right after being dubbed the “Super Dollar” by the media in the early to mid 1980’s, the US dollar topped out and fell into a protracted bear market. The US Dollar index is a geometrically weighted index of the US dollar against a basket of currencies (Euro, Yen, Pound Sterling, Canadian dollar, Swedish krona and the Swiss franc). At its inception in March 1973, the index was 100 and it has long term support in the 80 level.

Most recently, this level was broken to the downside but it would seem that was a very nasty bear market trap. Right now the US dollar index seems to be trying to find support yet again around the 80 area. And with the help of the extremely bearish sentiment it just may do that.

Upside Down Carry Trade
The resulting injection of liquidity and the lowering of interest rates globally has been an inversion of the carry trade. Now the world seems upside down as the carry trade has flipped from the Yen to the US dollar. One scenario would have the carry trade become extinct (at least temporarily) as interest rates reach an equilibrium which removes any incentives to borrow in one and invest in another. Another scenario would be the Japanese monetary policy tightening even slower than the US which would shift demand back to the dollar.

Can the Fed pull a rabbit out of its hat? That is to say, can they strike the balance between protecting a resurgence of economic activity while not nuking the dollar? If they do, it will be among precious few achievements on their mantle. Right now sentiment is skewed severely towards bearishness on the dollar and a disbelief in any outcome other than one in which the US dollar is laid to waste. Given everything we know, this may seem to be the most rational way to think about things. But you have to wonder when so many are taking the same side of a trade.

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4 Responses to “US Dollar Sentiment: Contrarian Bullish”  

  1. 1 alfagetti

    Interesting post, thanks. Look at equities nudging recent highs, and everywhere you turn there is yet another reminder of how the dire US fiscal situation is and yet… the US dollar isn’t hitting new lows. I think this is an important divergence, and agree that the USD is probably bottoming.

  2. 2 vkj2009

    You mentioned US dollar sentiment is 16%.

    As of this week, this post shows that too many are bullish on US dollar Is is correct or the above?

    One more point: UUP is still with in downtrend channel and as of today broke down of a falling wedge with in this channel. Is Bob Prechter wrong?

  3. 3 inthemoneystocks

    When the U.S. Dollar Index declines it will usually help to inflate asset prices. Many people that are retired and live a fixed income really feel the effects of a declining dollar the most. Costs of all the goods that individuals need to survive will increase higher. Food and energy are two products that will increase the most when the U.S. Dollar Index declines. The recent food riots around the world have been blamed on the declining U.S. Dollar Index. Should the U.S. Dollar Index trade below its recent low of $75.24 the next important daily chart support would be around the $74.22 level which is the low made on November 24, 2009. The all time low for the U.S. Dollar Index was $70.69 made on March 17, 2008.

    Nicholas Santiago

  4. 4 ewkeane

    stick a fork in it. its done.

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