Investing.com -- Currency markets often experience regime shifts, which are more significant for long-term asset allocators than for traders or hedge funds. According to BCA Research, a potential balance-of-payments crisis would represent an important regime shift that could affect the US Dollar Index.
"Mechanically, the dollar needs to depreciate," strategists led by Chester Ntonifor wrote in a client note.
BCA indicates this potential crisis "has been well telegraphed amongst most of our colleagues," signaling widespread awareness of this risk among market analysts. Despite these longer-term concerns, BCA emphasizes that technical indicators provide valuable guidance for investors looking to capitalize on countertrend currency movements.
"The key takeaway is that while most investors have rightly focused on the fact that US exceptionalism is probably over, which will continue to lead an exodus from US assets, they could be offside on a three-to-six-month horizon," Ntonifor added.
For investors with a three-to-six month horizon, BCA’s tactical indicators currently support taking long positions on the dollar. This recommendation focuses on shorter-term market dynamics rather than long-term structural factors affecting the currency.
Strategic investors with longer time horizons are advised to take a different approach. BCA recommends these investors "sell on strength," suggesting they should use any dollar rallies as opportunities to reduce exposure to the currency.
Particularly, technical analysis shows 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 dollar’s oversold condition has prompted BCA to recommend reopening long positions on the U.S. dollar index. They are also now recommending short positions on the British pound at current levels, citing its overbought status. The technical indicators suggest sterling may be due for a correction after recent gains.
Overall, BCA remains "long-term bearish the US dollar," but notes that "tactical indicators do matter."
"Right now, they are telling us the USD is due for a bounce. The most vulnerable currencies according to these indicators are sterling, the Norwegian krone and the euro," Ntonifor concluded.
