US Dollar Index - Time to Take a Step Back? Did this analysis foreshadow bitcoin's big spring run up?

in #investments7 years ago (edited)

Sometimes with all of the rhetoric on currency manipulation, strong dollar policies, weak dollar policies, devaluation, etc., etc., it can be informative to take a step back and look to see if the price itself can cut through the crossfire. There is more than one way to study the US dollar, but a decent benchmark is the US Dollar Index which is composed of 57.6% Euro (EURUSD), 13.6% Yen (USDJPY), 11.9% Sterling (GPBUSD), 9.1% Canadian $ (USDCAD), 4.2% Swedish Krona (USDSEK), 3.6% Swiss Franc (USDCHF).

The chart above (may need to scroll right to get whole chart) is a linear (regular) monthly candle chart of the US Dollar Index starting in 1987 and running through to present time. There are a few things to point out:

1.We start in the middle of the chart. You can see the Dollar peaked at 121 in 2001 - this was right about the time the equity market finally broke down as the dotcom bubble finally imploded for good.

2.The Dollar sold off/weakened from that point in 2001 all the way to March of 2008 stopping at 70.70 and having lost 41.5% of it's value over that time period.

3.Roughly 7 years down, then, from March of 2008, just about 9 years up into the 103.82 high registered two months ago in January. +46.8% from that low in 2008!

4.As we zoom in to the past few years we've seen a series of peaks in price connected by the thick white trend line. While price was punching out slightly higher highs, the momentum (shown in the panels in the bottom half of the graphic) was sporting lower highs marked with the same thick white trend lines - not confirming those price highs.

5.Finally, there is a big trend line below the price series shown in red. When you look at the current price you can see it's trapped between the red supporting trend line and the white resistance trend line that connects those recent price peaks. There is also strong, multi-year resistance denoted by the thick dashed red horizontal line that crosses right at the recent highs.

So what can we take away:

•9 years up into January of this year, +46.8% from trough to peak is a very large move for the US Dollar

•Momentum is slowing and price is running out of room to the upside in the wedge formation (white and red trend lines).

•The stock market can go up in a period of dollar weakness (2003-2007) AND strength (1995-2000, 2009-2017). So the stock market likes a trending dollar, not one that changes directions. Currently we have a rising stock market with a strong dollar.

With the Fed in the initial phases of a tightening cycle, Trump implementing protectionist policies and championing a strong dollar stance, and anti-EU political fever in Europe threatening to torpedo the Euro, it would seem unthinkable to back off a bullish dollar position. And to that point, an informal read of sentiment on my part reveals an almost religious belief in the bull run continuing. It's hard to argue any of the fundamental points but like any market, in the end, it's a game of positioning. Sometimes we have to take a step back and see what price is telling us, and what we know after looking at this Dollar chart is there is some real vulnerability here.

Could we make another high (above 103.82), yes. To that end, the dollar has weakened fairly substantially since the ECB rate comments last week and may be due for a short-term bounce. That said, I think the bigger, long-term risk is to the downside. Keep in mind we're working with a monthly time frame so we are not focusing here on 3-5% moves but those 5%+ moves that have real impact on portfolios and markets.

100.00 (+/- 20 cents), for reasons other than a round number/psychological barrier, is going to be pretty important near term (currently trading 100.22). I think if it has trouble holding that level we see a test of the 98 level which is where it should hold if it's going to avoid breaking down. Again, this is a longer-term vista so these price levels could take some time to play out even though they are not too far from current levels.

Remember, IF we do get that downturn, the ripple effects may be very pronounced given the Dollar's reserve currency role in pricing a multitude of financial and physical assets and heavily impacting export-based economies. And finally, remember the stock market also dislikes changes in the direction of the dollar.

Please see the disclaimers and disclosures at the bottom of the webpage (www.synchronicityinvestments.com). We currently have no position in the Dollar Index but reserve the right to take a position at any time. We analyze markets on many different time frames and may be bullish/have a long position short-term in a market that we are bearish on long-term (and vice versa). The information in this report is not intended to be, and shall not constitute, an offer to sell or a solicitation of an offer to buy/sell any security or commodity investment product or service. It should not be assumed that Synchronicity's methods as presented will be profitable or that they will not result in losses. The indicators and strategies are provided for informational and educational purposes only and should not be construed as investment advice. Accordingly, you should not rely solely on the information in making any investment.

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