'Crowded dollar long trade may struggle in 2016' - Matt Weller, FOREX.com

MATT WELLER 
PROFILE:
• Current Job: Senior Technical Analyst for FOREX.com
• Career: A Chartered Market Technician (CMT) and a member of the Market Technicians Association. His analysis has been quoted in the Financial Times, Reuters, MarketWatch, and the Wall Street Journal.

View profile at FXStreet

Matt Weller is a Senior Technical Analyst on FOREX.com’s research team. Matt creates regular research reports focusing on technical analysis of the forex, equity and commodity markets. In his research, Matt utilizes candlestick patterns, classic indicators, and Fibonacci analysis to anticipate potential market moves

In addition to his regular research reports, he has discovered a passion for teaching others about trading and has conducted over 1200 educational webinars on different aspects of trading and trading psychology.

Beyond the always-insane political situation in the US and elsewhere, many traders will likely remember 2015 for the frustrating trading conditions. Many widely-followed markets, prominently including US stocks and the dollar, moved essentially sideways for the entire year. That said, there were pockets of the trading world where major trends formed (oil and other commodities), so 2015 underscored the importance of trading a variety of instruments and not getting locked in to just one market.

My most important achievements of 2015 will be paying dividends for years to come. Most notably, I greatly enhanced my spreadsheet analysis / programming skills and used those new abilities to develop new trading strategies and models (stay tuned in 2016 for more on this front). On a personal note, I successfully passed Level II of the grueling CFA curriculum and registered for Level III this coming June – hears to hoping that I’ll be done studying come this time next year!

After years of global central banks cutting interest rates and easing policy in unison, we could see a lot more volatility around central bank meetings in 2016. While some banks, including the ECB and BOJ, will likely maintain dovish policies throughout the year, there is far more ambiguity with regards to the actions of the BOE, RBA, BOC, and others, and traders may have to recalibrate their projected interest rate paths multiple times next year. Readers will have to stay plugged in and nimble to ride the potential market waves that will follow.

Subject, as always, to the caveat that my crystal ball is not perfect, I feel like the crowded dollar long trade may struggle in 2016. Though the Fed still stubbornly projects four interest rate hikes in the coming year, traders are more skeptical, only pricing in 2-3 rate increases. With US Manufacturing activity already slowing down due to the elevated dollar and other major economies, including Europe and China, struggling, I believe that there’s a risk that the US central bank may only be able to squeeze in one or two “dovish” hikes this year.

Of course, the other side of the US dollar coin will always be the Euro, which is actually seeing more growth in industrial activity than the US of late, according to the most recent PMI surveys. The short EUR/USD trade is once again extremely crowded, with the CFTC’s Commitment of Trader data showing that speculative traders are short over 200k EUR/USD futures contracts, so a bounce could be in the cards for the world’s most widely-traded pair in 2016.

I would say that EUR/TRY definitely qualifies as an under-the-radar pair, and the Turkish lira looks as vulnerable as ever as we flip our calendars to 2016. Though the ever-present political uncertainty has seemingly been resolved as of November’s election, Turkey’s economy still has plenty of issues. Unemployment is elevated above 10%, real GDP growth is only 1.3% as of the most recent quarter, and inflation running on at 7.5%, creating a classic stagflation environment. The central bank’s political independence is under question and Turkey sits in volatile region between Russia and Syria, creating a potentially explosive Molotov cocktail of risks for lira bulls.

6. Which macroeconomic events will have the biggest impact on the FX markets in 2016?

It’s not rocket science, but the impact of the Federal Reserve’s decision to start raising interest rates for the first time in nearly a decade will have a major impact on all markets in 2016. The biggest impact could be in emerging market currencies (see below), which have long been dependent on easy funds from the world’s most important central bank.

It might be a bit cliché at this point, but I still have a lot of worries about emerging markets. While some other banks have tried to fill the gap (notably including the ECB and BOJ), the Fed’s decision to start normalizing monetary policy creates a funding crisis for some vulnerable emerging markets. I think there’s a higher-than-usual risk of a major debt default in a large emerging market economy in 2016.

I’ll be focused, as always, on the cues the market gives me. Inevitably at least some of my predictions for 2016 will prove to be incorrect, so if I see paradigm shifts in policy and macroeconomic trends, as well as key technical levels giving way, my views and positions will evolve.

Not to toot our own horn too loudly, but we have a tremendous team of analysts at FOREX.com and a couple of big new developments planned for 2016 – stay tuned!

My biggest New Year’s resolution is to meditate more. For about a month in 2015, I would meditate early in the morning and found that I had better focus and calm throughout the day. I’d like to get back on the wagon and try to meditate every day in 2016.