A few things to consider here:
- We would caution against relying on oversold RSI readings, sentiment and COT reports - to position mean reversion strategies in this kind of environment. Look no further than the recent action in the Japanese yen and the precious metals miners for examples of the inertia behind these moves. You typically find strongly oversold conditions develop on an hourly and daily basis and replicate through to the weekly measure over time. To a degree, we expect similar dynamics to develop in silver, gold, the euro and the Aussie over the coming weeks.
- Of the previous two (2) occasions where the euro:US dollar index exhibited a pronounced drop in the historic correlation - the return trip to "normalcy" was commensurate to the size of the "signal". Both occasions marked exhaustion for the euro - and the asset river that runs through it (see Here). Also, on both occasions (8/08 & 9/11) silver failed quite dramatically over a relatively short timeframe.
- Downstream, we expect the ledge support for the euro extending from November 2005 - to fail in this decline and add further downside momentum to the move.