Silver said to be the latest target of a short squeeze: XAG/USD, DXY, AUD/USD

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Joe Perry
By :  ,  US Market Analyst

As many traders have seen over the last week, stocks with large short positions have gotten squeezed.  Traders place large bets on these heavily shorted stocks, hoping the sellers will be forced buy them back as prices move higher.  Some of the targets include GME, AMC, EXPR and KOSS.  However, today traders are said to be targeting SLV, which is the ETF for XAG/USD.  Can traders drive the price of Silver higher in order to squeeze out short positions?

Silver, as with Gold, is a precious metal.  Precious metals often act as an inflation hedge.  A move lower in the US Dollar often creates inflation.  Therefore, as the US Dollar is often moving lower, the price of precious metals move higher.  SLV and XAG/USD are not stocks.  If one is trying to squeeze the shorts in Silver, that would mean that it would affect the US Dollar and the largest traded market in the world, the currency market. This is a key difference between a precious metal and a stock. Central banks around the world are backing the currency market.  World-wide central banks will not let a few ill-intended traders manipulate currency markets.  The long wicks on the hourly chart below imply that traders understand this concept, and that the bid may not hold very long.  In addition, the RSI is overbought on the short-term and price may be ready for a pullback.

Chart analysis of silver vs US Dollar with long wicks on chart. Published in January 2021 by FOREX.com

Source: Tradingview, FOREX.com

One can indeed argue that the price of the US Dollar (DXY) has been moving lower since the pandemic and that Silver could be rising due to the onset of inflation.  However, with the short squeezes in some of the previously mentioned stocks, that is most likely not the case.

As mentioned, movements in precious metals affect the US Dollar.  On a 60-minute timeframe, the US Dollar Index (DXY) traded down to yesterday’s lows, however, has held so far today. 

Chart analysis of the US Currency index. Published in January 2021 by FOREX.com

Source: Tradingview, FOREX.com

With the move higher in metals and the move lower in the US Dollar, one may expect commodity currencies, such as the AUD/USD, to be bid as well.  And that is the case so far today.  On a daily timeframe, AUD/USD has moved sideways out of the upward sloping channel and pulled back today, however price held the 200 Day Moving Average near 0.7520 as the RSI continues to move towards midrange.  If price closes near current levels (0.7675), the daily candlestick would be a hanging man formation, a sign of a possible move higher.

Chart shows a hanging man formation of the AUD against the USD. Published in January 2021 by FOREX.com

Source: Tradingview, FOREX.com

 On a 240-minute timeframe, price was moving lower throughout the Asian and European session and broke the bottom trendline of the downward sloping channel.  However, price held the 61.8% Fibonacci retracement from the December 20th, 2020 lows to the January 6th highs.  As Silver began moving higher and the US Dollar began moving lower, AUD/USD bounced 85 pips! First resistance is at 0.7680 and then the top trendline of the channel near 0.7750.  If price fails below 0.7680, intraday support is at 0.7640 before today’s low of 0.7621.

Chart analysis of AUD to USD. Published in January 2021 by FOREX.com

Source: Tradingview, FOREX.com

As silver is a precious metal, a targeted short squeeze would affect the value of the US Dollar.  However, if that is the case, don’t expect central banks to sit on their hands.  Although the US Dollar may move lower for other reasons (ex: stock market indices up nearly 2%),  “games” with precious metals are not one of them.

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Related tags: Silver Forex AUD DXY

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