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Now That Everyone Hates This Trade, It's Ready to Pay OffBy Jeff ClarkTuesday, July 20, 2010 Not since the Titanic has anything capsized so fast.
The long-dollar/short-euro trade that was so popular one month ago sank almost immediately after I wrote about it. There were just too many people looking for a collapse in the euro and a continued rally in the dollar. No matter how solid the logic behind a position, when a trade gets too popular, it's bound to go the other way.
Now, with the dollar down 8% from its June highs, the euro up 8% from its lows, and most traders having bailed out of their positions, it may be time to put this trade back on.
After all, the dollar is quickly approaching an important support level. Here's an updated look at the chart...
 The dollar broke down from a bearish rising-wedge pattern six weeks ago, and the chart projected a move down to about 82 on the U.S. Dollar Index. We've just about hit that target, and the chart is poised for at least a short-term bounce.
As for the euro...
That worthless currency has benefited from the anticipation of good news coming out of the European banking sector this Friday. Europe's banking watchdogs have been running so-called stress tests to boost confidence in the sector as it attempts to emerge from multiple crises. And the euro has been rallying as the market expects positive results.
Of course, it's all baloney. The European banking system is on life support. But the government-sponsored stress tests will report all is fine. It has to be. The risk of a run on the banks and a currency collapse is just too big if the report indicates otherwise.
So traders have been covering their short positions and pushing the euro higher just to get out of the way ahead of the "good" news.
But I expect this will be a case of "buy the rumor and sell the news." Any good news is already priced into the euro. Once the news is out of the way on Friday, the euro will be free to resume its decline toward worthlessness.
Being long the dollar and short the euro one month ago was a disaster. The trade was just too popular, and the market rarely rewards popularity.
Today, however, now that most folks have busted out of their positions, this trade looks ready to pay off.
Best regards and good trading,
Jeff Clark
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