As you know, once a month, we look at 29 currencies in search of the evidence of popular delusions and the madness of crowds. The idea is to find anomalies and bullish or bearish divergences that will break the trend, not prolong it. It is a painful exercise, but also highly rewarding.

In order to find the most overbought and oversold currencies, I conduct five econometric studies: over-extension analysis, secular performance analysis, oil correlation review, economic divergence analysis and effective exchange rate study. Additionally, I look at traders’ positioning to understand the psychological state of the market.

Analyzed currency pairs: AUD/USD, EUR/USD, GPB/USD, NZD/USD, USD/CAD, USD/CHF and USD/JPY.

Relevant ETFs (most popular): CROC, OTC:ERO, EUFX, FXA, FXB, FXC, FXE, FXF, FXY and OTC:GBB.

Macro Forces

Before revealing the results, let me first say a few words about the current global market environment. This is important because global macro conditions cannot be numerically measured and cannot be directly factored into econometrical models. They must be studied in qualitative terms. In my opinion, the most important theme impacting global foreign exchange market right now is the spread of coronavirus and the possible economic damage that it may cause.

See below the outlook on the world’s major economies (China, the Eurozone and the United States) for two scenarios: one with and one without a second wave of the virus.

Source: ABN AMRO; Baseline scenario: second wave less severe, no renewed lockdowns; Negative scenario: a second wave of infections and a second lockdown.

Although the risks of a renewed lockdown are still substantial, the baseline scenario assumes that the virus remains reasonably under control. Local outbreaks will continue (as at present) and fresh measures will be taken where necessary, but no national lockdowns

A hand holds a series of fanned out U.S. dollar notes.

Thomas Trutschel | Photothek | Getty Images

The dollar was on the defensive at a one-week low on Thursday, as robust U.S. data and fresh hopes for U.S. fiscal stimulus had investors confident enough about economic recovery prospects to seek out riskier currencies.

U.S. Treasury Secretary Steven Mnuchin told reporters that talks with House Speaker Nancy Pelosi “made a lot of progress” on long-awaited Covid-19 relief legislation.

Along with strong U.S. labor and manufacturing data, that helped stocks to rally and the mood pulled the dollar to a one-week low of 93.664 against a basket of currencies.

Early in the Asia session the New Zealand dollar extended gains to a one-week peak of $0.6623. The Aussie rose 0.1% to $0.7170, a fraction below a one-week top of $0.7175 made overnight.

Mnuchin said later on Fox Business News that he would not accept the Democrats’ proposed $2.2 trillion aid package, rather something closer to $1.5 trillion, adding that an agreement had been reached on direct payments to Americans.

“The two sides have come a long way,” said Westpac FX analyst Sean Callow.

“The rhetoric is reasonably conciliatory, I think we’re getting closer,” he said, adding an agreement would help the mood in equity markets and likely spill over into currency trade, boosting riskier currencies at the dollar’s expense.

At the same time, jobs figures that showed U.S. private employers stepped up hiring harder than forecast last month and that Midwest manufacturing grew faster than expected also fed in to the positive sentiment.

Chinese data on Wednesday had also shown the recovery on track in the world’s second-biggest economy.

The yuan edged up to a week-high 6.7804 in offshore trade on Thursday, though volumes are thin and the onshore market closed