Sentiment Speaks: When Supermodels And Billionaires Can Clue You In To A Currency Crash

Summary

• The U.S. dollar made headlines in late 2007 as it hit record lows.
• Strong headlines and extreme sentiment foreshadowed a major bottom.
• Here's what the current sentiment indicators are forecasting for the U.S. dollar.

There are many ways investors, analysts, and pundits attempt to predict the price of the stock, commodity, and currency markets. Most investors and analysts will use some variant of fundamental analysis in an attempt to ascertain what the future for the markets hold. In the case of the currency markets, this typically involves looking at the many macroeconomic factors of one country vs. another. This can include interest rates, inflation, and GDP, amongst a host of other factors. Unfortunately, these factors are not forward-looking and will typically lag those of the freely traded markets, the latter of which are driven by investor sentiment. So if the markets are driven by sentiment, then the question is: How do you measure sentiment? Well, there are several methods of analyzing sentiment, most of which are technical in nature. When sentiment reaches extremes, however, these sentiment indicators are out in full force for the world to see. We can use these sentiment indicators to see how this affected the price of the U.S. dollar index in the past and what the current sentiment indicators are telling us about where the U.S. dollar is likely headed over the course of the next several years.

An example can be found back in late 2007, just before the global financial crisis took hold, when we saw the U.S. dollar index (DXY) hit record lows striking the 70.70 level. These were levels that had never been seen before, dating all the way back to the end of the Bretton Woods agreement in the early 1970s when the U.S. dollar began to freely float against other major world currencies. So as we hit these record lows at the end of 2007 it simply appeared that no one wanted U.S. dollars. This was quite evident in the type of news articles that we saw coming out of mainstream news organizations. We saw a barrage of articles touting how the euro was the new king of currencies and the end of the dollar was near. This dollar disgust even crept its way into fashion magazines as it was widely published at the time that supermodels were demanding being paid in euros and would no longer accept paying in the form of U.S. dollar.

In November 2007 article in the fashion magazine Marie Claire, it was reported that model Gisele Bundchen's manager, and twin sister, told the Bloomberg news agency: "Contracts starting now are more attractive in euros because we don't know what will happen to the dollar." Gisele wasn't the only dollar bear at the time; even the likes of Warren Buffett were quite bearish on the U.S. dollar at the time. When asked by CNBC in October of 2007 "What the best currency in the world to own right now?" Buffett responded with a laugh, "Not the U.S. dollar." Clearly, sentiment for the U.S. dollar had reached an extreme low as when it was being widely reported that not only billionaires shrugging off the dollar but also supermodels.

As sentiment extremes are just that, extreme, it took just a few months for the U.S. dollar to begin a massive push higher that didn't stop for 10 years. This push finally stopped in 2017 when the DXY topped out at just under 104 or some 46% higher than where it stood when Gisele demand being paid in Euros. In euro terms, the euro took a 35% hit during that same 10-year period. So Gisele and her manager did correctly forecast that they really didn't know what will happen with the US dollar, I don't think losing 35% in value of those euro contracts in dollar terms is what they had in mind.

Since that top we saw back in 2017, the DXY has been far tamer and we have not seen nearly the type of one-sided action that we saw leading up to the 2007 bottom or 2017 top. In fact, from a longer-term perspective, we have actually seen the DXY move in a relatively tight range, oscillating from 102 to a low just over the 90 level. This action was not terribly surprising after seeing the type of action that preceded this sideways grind. In fact, based on the current structure that I am watching on the long-term DXY chart, this sideways range-bound action may be here for several more years. I think it is likely that the U.S. dollar staying under the 102 level upon the next push higher towards the middle part of this decade before dropping back below our current levels later in the decade. I am showing this projected path in the attached chart below.

So with this sideways action in the DXY, one should not be shocked that we have seen very little attention paid price of the U.S. dollar in relation to its value against foreign currencies. If the path that I am projecting does indeed follow through as laid out over the next several years, then I would expect this to remain the case for some time. If, however, we start to see news articles coming out of the fashion world calling for a currency crash, then it will likely signal that sentiment has reached an extreme and things are likely ready for a major turn.

Source: Michael Golembesky, ElliottWaveTrader