The dollar remains an undisputed beneficiary of Trump’s victory in the presidential election, with its relentless rise inflicting enormous pain on some emerging market assets and commodities.

However, if traders believe the dollar’s ​​rebound has gone too far, too fast, it could also set the stage for further volatility.

“The dollar is overbought and challenging resistance, while some metals and emerging markets are oversold and trying to hold above key support levels,” Kevin Dempter, an analyst at Renaissance Macro Research, said in a report on Thursday.

“We will closely watch their reaction to overbought and oversold conditions. A strong reaction to overbought conditions in the dollar could lead to a bullish trend change, also in metals and emerging markets,” he added.

Red arrows represent overbought, green arrows represent oversold

The dollar index, which measures the currency against a basket of six major currencies, hit its highest level in a year after the U.S. election, but its rally actually started earlier, when U.S. Treasury yields began to rise in response to strong economic data and expectations of a Trump victory, the latter of which was seen as likely to lead to larger fiscal deficits, greater inflationary pressures and fewer interest rate cuts by the Federal Reserve.

The dollar was boosted in part by those factors as well as expectations that broad U.S. tariffs on imports would boost demand for the greenback.

Broadly speaking, a rapidly strengthening dollar would be painful for emerging markets, sucking away foreign investment and capital. It would also make it harder for emerging market borrowers to pay their dollar-denominated debts. The iShares MSCI Emerging Markets exchange-traded fund (EEM) fell 4.7% from Election Day through Wednesday’s close and is down 8.8% from its recent peak on Oct. 7.

U.S. stocks have surged, outperforming other developed and emerging markets. The S&P 500 closed above the 6,000 milestone for the first time in history on Monday before retreating somewhat, but is still up nearly 25% so far this year.

A strong dollar could also weigh on dollar-denominated commodities, making them more expensive for consumers using other currencies. Copper futures have fallen 8.7% since Election Day and are down more than 21% from their all-time highs hit earlier this year. Other industrial metals have also suffered, while gold has retreated after setting a series of records this year.

Gold mining stocks tracked by the Van Eck Gold Miners ETF (GDX) have retreated sharply and turned deeply oversold, approaching support at its 200-day moving average, Dempter said. A break below that support level, which was at $35.19 Thursday, according to FactSet, would be a signal to start a rotation, he said.

A stronger dollar also hammered oil futures, which have also been grappling with weaker Chinese demand and rising output from countries outside the OPEC+ group.

Stephen Innes, managing partner at SPI Asset Management, said Asia would be hit hardest if the dollar continues to rise, after a surge in the greenback hit the region hard, hammering local currency debt, which he called the backbone of Asia's emerging markets.

However, Fundstrat head of technical strategy Mark Newton said that if the dollar maintains its seasonally weak pattern in December, the situation could ease. This is possible in his view. He pointed out that over the past 10 years, December has tended to be the worst month of the year for the dollar index, with an average decline of 0.95%.

“Overall, the key takeaway is that despite the ongoing downtrend over the past month, emerging markets are likely to stabilize in December as the dollar begins what could be a one-month pullback,” he said.

Article forwarded from: Jinshi Data