Should you buy or sell US dollars in the next three to six months?

The money market frequently undergoes institutional changes, which are more important for long-term asset allocators than for traders or hedge funds. A potential balance of payments crisis would represent a significant institutional change that could affect the US dollar index.

‘Mechanically, the dollar needs to depreciate,’ strategists led by Chester Ntonifor wrote in a client report.

BCA noted that this potential crisis ‘has been widely anticipated by most of our colleagues,’ indicating that market analysts are generally aware of this risk. Despite these long-term concerns, BCA emphasised that technical indicators provide valuable guidance for investors looking to capitalise on counter-trend currency movements.

‘The key point is that while most investors are correctly focusing on the fact that American exceptionalism may have come to an end, which will continue to drive capital outflows from U.S. assets, they may be at a disadvantage within a three- to six-month timeframe,’ Ntonifor added.

For investors with a three- to six-month investment horizon, BCA's tactical indicators currently support a long position in the dollar. This recommendation focuses on short-term market dynamics rather than the long-term structural factors influencing the currency.

Strategic investors with a longer-term perspective are advised to adopt a different approach. BCA recommends that these investors ‘sell on rallies,’ indicating that they should use any dollar rebound as an opportunity to reduce their currency exposure.

In particular, technical analysis shows that the Norwegian krone (NOK), British pound (GBP), and euro (EUR) are currently the most overbought currencies in the market. Meanwhile, the Japanese yen (JPY), New Zealand dollar (NZD), and Australian dollar (AUD) remain in relatively neutral positions.

The oversold condition of the dollar has prompted BCA to recommend re-establishing long positions in the dollar index. They also now advise shorting the pound at current levels, citing its overbought status. Technical indicators suggest the pound may experience a pullback following its recent rally.

Overall, BCA remains ‘bearish on the US dollar in the long term,’ but notes that ‘tactical indicators are indeed important.’

‘Currently, these indicators suggest the US dollar will rebound. Based on these indicators, the most vulnerable currencies are the British pound, Norwegian krone, and euro,’ Ntonifor concluded.