This Major Currency is Set For a Reversal

Most folks feel like artificial intelligence was the only investment story of the past couple years. But people who paid attention know that wasn’t the case.

There was also a massive global metals and mining boom…

Gold and silver got the glory during most of that run-up. Meanwhile, less exciting base metals, like copper, had an incredible run of their own.

That story led to another bull market… in the Australian dollar.

Australia’s currency rallied as much as 20% in just the past year. Now, traders are betting the rally will continue at a crazy level. But according to history, the crowd is wrong.

Instead of a continued boom, the major currency is set for a reversal. And we could easily see a double-digit drop in the months ahead.

The Australian Dollar Is Set to Reverse Course
Mining is Australia’s largest exporting sector. It accounts for more than 10% of the country’s GDP.

So when mining is booming, the Australian economy does well… And when the economy is strong, its currency rises.

That’s what we’ve seen over the past year. A 20% rally like this is a massive move for a major currency.

Traders have taken notice. And now, they’re betting on a continued bull market.

We can see this by looking at the Commitment of Traders (“COT”) report for the Australian dollar. This weekly report shows us the real-money bets of futures traders. Importantly, when these folks agree, they tend to be wrong.

You can see that in the chart below. It shows the Australian dollar versus the COT. When the COT is high, futures traders are extremely bullish… And every time that has happened, the Australian dollar has fallen. Take a look…

The COT is such a powerful contrarian tool because futures traders herd just like other groups. When they’ve all bought, and the COT is high, there’s no one left to push prices higher. And that means prices are due for a reversal.

As you can see, the COT peaks at different levels over time. But whenever we see a new multiyear high, the Australian dollar reverses.

Now, let’s look at the specific numbers. I’ve highlighted the past five major signals shown in the chart above. Here’s what happened next…

Remember, major currencies aren’t like stocks. They don’t usually move double digits in a short period of time. But it’s possible when sentiment hits rare levels like we have today.

For the Australian dollar, these setups led to an average decline of 16% over 15 months. The most extreme case kicked off a long-term bear market… leading to a 27% drop over two and a half years.

I don’t expect that kind of collapse this time around. The mining boom is still going strong. But sentiment for the Australian dollar is simply too high.

So a reversal might not happen in the next few weeks… but the boom is almost certainly behind us. And the next big move for this currency will likely be a double-digit drop.

Good investing,

Brett Eversole

Source: Daily Wealth