While the U.S. Dollar retreated against all major currencies last week, it is still the cleanest dirty shirt in the FX world and is likely to surge in 2020, writes Andy Waldock.

There is no new COT data this week because of the holiday. Therefore, we’ll briefly run through a few markets and possible scenarios.

The foreign currency markets virtually all gained on the U.S. Dollar last week. We think this is a blip, and won’t change the developing strong dollar theses with which we’ve been working. Dollars are the most reliable store of value in the most liquid market. This makes dollar-denominated assets appealing to foreign investors facing negative interest rates.

The expected U.S. dollar strength runs counter to the metals rally. We recently published two seasonal articles covering gold, platinum, and silver. The last one was titled “Silver and Platinum to Surge into the New Year.” Obviously, our seasonal analysis is separate from our Commitment of Traders analysis, and we discussed the crossroads between the two in our platinum COT analysis here, last week. Typically, precious metals trade inversely to the currency in which they’re quoted. This is tied to the relationship between inflation and the underlying currency. Usually, the commercial selling would come nearer to the end of the predicted window of seasonal strength. This makes the commercial traders’ record short position a temporal anomaly.

We follow this up with, “Markets can remain irrational longer than bad traders can remain solvent.” The buildup of positions within the COT report can take several weeks to months before finding its tipping point and reversing course (see table). This is how swings that don’t swing become trends. The proper employment of multiple strategies and methodologies can mitigate the time factor between successful weekly COT trades. In this case, my seasonal strategies are long the precious metal markets while waiting for the weekly COT signals to provide a reversal. This is the only way we can hold a long platinum position in the face of record net short commercial holdings.

cot table

The sugar market is following a more typical version of the commercial traders’ actions in conjunction with seasonality. Sugar prices bottomed at 11.74¢ per. lb. in September when we issued the following comments in our Sept.  16 Weekly COT Signals, “Finally, watch the October or March sugar contracts. Sugar is oversold, and the commercial traders have just set a new net long record position ahead of anticipated seasonal strength beginning in the next week, and lasting through mid-October.”

The sugar market is now trading above 13.50¢ and facing its first window of weakness later in January. While we have no new data this week, sugar producers have been net sellers for five straight weeks. We expect that the speculative bid will run off of gas within the next couple of weeks. This will force prices lower as speculators exit the market. Then, we’ll see a new round of price discovery as processors decide whether to step up or sit on their hands into Valentine’s Day.

It’s all connected, typically in ways we’ve already seen. The simultaneous climb of the metal and Dollar Index is novel and exciting.  

Here is what Andy had to say about seasonality and the COT Report at the TradersEXPO New York. Visit Andy Waldock Trading to learn moreRegister and see our daily and weekly signals archive for entries and stop loss levels sent to our subscribers.