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Will the US dollar fall off the cliff?

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The ICE US dollar index DXY is reeling under pressure and has fallen to multi-year support zone of 92-93. At the start of the year, most big brokerages and banks were bullish on the dollar and they expected it to rally in 2017, extending its bullish run that started post the US Presidential elections.

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Key observations

  1. The US dollar topped out in January of this year
  2. The DXY has fallen more than 10% from its highs and is likely to fall to multi-year lows.
  3. Most of the fall can be attributed to politics, rather than to a weak US economy
  4. The US economy continues to be strong and the Fed is likely to continue its tightening cycle
  5. If the Trump administration can pass a respectable tax reform, the dollar will rebound sharply

However, the DXY topped out at 103.82 on January 03, of this year and has fallen more than 10% since then.

So, is the dollar doomed or is this fall a buying opportunity for the medium to long-term?

Reason for the US dollar’s strength after the US Presidential elections

Donald Trump’s victory in the US Presidential elections boosted the dollar on hopes that tax cuts and higher infrastructure spending will invigorate the economy and force the US Federal Reserve to raise rates at a much faster pace than previously envisaged.

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As a result, the DXY index rallied from a low of 95.89 on 09 November 2016 to a high of 103.82 on January 03 of this year, a gain of more than 8% within a short span of time. However, the DXY topped out at that level and has been in a downtrend ever since.

But why?

What has changed since then?

To start with, the President started deflating the dollar balloon when he said that the dollar was “too strong” during his interview with the Wall Street Journal on January 16 of this year.

Along with that, the repeated failure of the current administration in repealing the Affordable Care Act, also known as Obamacare increased the uncertainty around the tax reforms  – a major event that will affect the dollar.

Though the Republicans are confident of passing the tax reforms before the end of the year, only time will tell whether they are able to achieve their target. As long as the uncertainty remains, the dollar will remain weak.

The dark clouds over the eurozone have dispersed for now

The eurozone had been facing certain events, which threatened the existence of the euro. After Brexit, the Italy referendum and the French elections were keeping everyone on the hook. However, all those events passed without causing any major damage. That boosted the confidence in the euro.

Additionally, the analysts expect the ECB to taper its bond buying program soon. Though the ECB President Mario Draghi attempted to sound dovish, the markets did not buy it.

Similarly, the UK has not fallen apart after the Brexit. As these currencies regain their composure, the DXY gets pressured, as it is the weighted geometric mean of a basket of currencies.

Nevertheless, it is not all doom and gloom for the dollar. There are some positives as well. Let’s look at them.

The US economy is on a strong footing

The US economy grew 2.9% in 2015, the best since 2005, but slowed down considerably in 2016 to only 1.5%. In the first quarter of this year, the growth was dismal at 1.2%, however, the economy rebounded sharply in the second quarter, growing by 2.6%.

The strength in the economy has encouraged the Fed to tighten twice already this year. Nonetheless, the market participants are divided about the third rate hike before the end of this year, according to the Fedwatch tool data.

Rick Rieder, Managing Director, Global Chief Investment Officer of Fixed Income at BlackRock believes that the Fed will not go ahead with another hike in 2017. He, however, believes that the Fed will hike three times in 2018. Overall, the Fed has made it clear that the era of low-interest rates is over.

Not only that, Janet Yellen has said that the Fed is considering unwinding its massive bond holdings “relatively soon”. Both these events are bullish for the dollar.

But, does the dollar always rally when the Fed tightens? Let’s dive into its recent history to find out.

How did the US dollar perform during the last three tightening cycles?

In the chart (sourced from ashraflaidi.com) above, we can see the dollar’s reaction to the three previous tightening cycles.

On all the three occasions, the dollar behaved differently. While the dollar fell sharply during the 1994-1995 tightening period, it had a nice run in 1999-2000 period. On the other hand, it was largely range bound during the rate hikes in 2004-2006.

Therefore, it is not necessary that the dollar will rise with every tightening cycle. It will depend on a number of factors, both within and outside of the US.

What can tip the table in favor of the dollar this time?

The current slide in the dollar is more to do with the political missteps rather than the condition of the economy. After failing to repeal Obamacare, the Republicans are likely to do their homework and come prepared with a credible tax proposal that can see the light of the day.

If the tax overhaul is noteworthy, it alone is sufficient to propel the dollar higher.

Other than this, the geopolitical tensions with North Korea, China, and Russia can also send the traders scooping the dollar, which is quoting at multi-year lows. After all, the dollar is the de facto reserve currency of the world and is considered to be one of the safe haven currencies.

Though the eurozone looks stable currently, it still has to deal with Greece and the Italian banks in the long-term. Any brewing crisis there is likely to send the traders back into the dollar from the euro.

What are the risks for the dollar’s recovery?

If the current administration cannot get any significant legislative bills passed, it will be a major downer. The economic recovery is maturing. Any signs of a weakening growth will send the dollar down the sinkhole. It is unlikely that the dollar will fall due to external factors.

What do the charts tell us?

Let’s first analyze the weekly chart of the dollar index. As seen above, the dollar has been in a range between 93 and 100.5 since the beginning of 2015. The index broke out of the consolidation following the US Presidential elections last year, however, it could not sustain the gains and fell back into the range. Since then, it has been in a sharp decline, quickly falling from the top of the range to the bottom.

The DXY has bounced sharply from the 93 levels on two previous occasions. However, this time, a breakdown looks imminent. Nevertheless, an important point to note is that the dollar has fallen without any major pullbacks and the RSI is oversold on the weekly charts.

Every time the RSI has dropped in the oversold zone on the weekly charts it is followed by a sharp pullback. We expect the same to occur this time too. So, should one buy now?

The daily chart shows that the downtrend in the dollar continues. It has broken below the 93 levels and is threatening to fall to multi-year lows. Therefore, it is not the right time to go long. We should wait for the dollar to stop falling and then initiate long positions with a suitable stop loss.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Long-Term Cryptocurrency Analysis: Broad Correction Enters Next Phase

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The overbought BTC-led correction that has been the dominating technical process in the cryptocurrency segment in the last month or so continued in earnest today, amid the intensifying regulatory steps concerning the sector. The three-week-long consolidation that followed the initial mini-crash concluded with a sharp sell-off overnight rearranging the long-term charts, while likely kicking off another volatile period.

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While most of the crash lows held up today in early trading in the majors, especially in the case of the late leaders like Ethereum and NEO, some of the relatively weaker coins are already trading below the December minimums. We expect most of the majors to follow Dash and LTC, the weakest of the largest coins, lower and trade below the previous lows, as sentiment will likely swing to a bearish extreme.

The $11,300 level has been in the center of attention throughout the session today and the most valuable coin experienced heavy trading around the level as expected. As the daily MACD is still in neutral territory, the coin could be in for another leg lower, but after the 40% correction and the rather lengthy consolidation, investors could be looking for entry points during the move near the key support levels at $10,000, $9000, and the stronger levels at $8200 and $7700.

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BTC/USD, Daily Chart Analysis

As Ethereum is in a different part of its cycle the long-term momentum readings are still overbought, and that could mean a more protracted correction for the second largest coin. That said, following a multi-month consolidation like the one in Ethereum before, we still expect the token to outperform BTC from a long-term technical standpoint. ETH is now below the short-term trendline, and it’s likely to dip below $1000, and the prior top at $850. Further key levels are found at $740, $625, $575, and near $500.

ETH/USD, Daily Chart Analysis

Let’s see the outlook for the other major altcoins after today’s bloodbath.

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Crypto Update: Chinese Crackdown Triggers Next Leg of Correction

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The cryptocurrency segment is crashing again, with double-digit losses across the board, and with several coins shedding around 30% in one day amid the widespread and heavy selling. The sell-off was triggered by reports on a new set of measures by the Chinese authorities limiting crypto trading, which added to the still looming South Korea related regulation worries. Bitcoin tested the mini-crash lows at $11,300 today in early trading, dipping slightly below that level before a strong bounce started.

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The most valuable coin is now between two crucial support/resistance lines, with the other ahead at $13,000, and as the downtrend is entering its more mature phase the $10,000 and $9,200 levels could come in play, with a possible dip to the support zone near $7,650.

BTC/USD, Daily Chart Analysis

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Interestingly, the coin is still hovering within the daily range of the crash of December 22nd, and that points to a very active and volatile period ahead near the low at $11,300, as automatic orders will likely get triggered on both sides of the market.

The short-term setup is bearish, and although it’s possible that the primary support level will hold, odds still favor another leg lower, following the exponential run-up at the end of last year that pushed sentiment into bullish extremes.

BTC/USD, 4-Hour Chart Analysis

Altcoins

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Music: One Overlooked Use Case

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So far in this year, Ethereum has been the crypto star appreciating over 80% to a recent record of $1402. All this suggests that more and more applications are being created. We know this by the demand for Ether, the gas that drives the Ethereum network.

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The reason behind the explosion of Ether demand was confirmed by Ethereum co founder Steven Nerayoff in a CNBC interview where he claimed the number of Ethereum projects today is more than 10 times year ago levels.

One of those areas is the music business and there are several names appearing on the ICO list to add to your research agenda.

Why The Music Business Needs Help

Music may live forever but the business side has been in trouble for a long while. Over the last decade there have been only three years when the global value of music sales increased. The combination of digital music and outright pirating through peer-to-peer sharing has much to do with the long-term trend.

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Throughout the world there are 69 copyright and royalty societies given the responsibility of documenting, collecting and distributing music royalties. That means collecting a few pennies whenever a song is played on the radio, Internet or anywhere else. Four of the largest of these is in the US, followed by Japan, Germany and Britain. Their operations are truly byzantine.

Experts in the music-publishing field confirm the time between music usage and royalty payment can run close to 24 months. Even then not all royalties are distributed. According to my sources, there are often millions of dollars collected by royalty authorities everywhere that never make it to the entitled recipients. That sort of practice borders on criminal behavior but copyright and royalty societies operate in a sub-rosa manner making it difficult to understand their policies.

In the past just 4 major record labels controlled over 80% of the industry. These giants could afford a full time legal department to pursue royalty issues dominated the music industry. Today, however, independent labels represent almost one-third of the market. This means less democracy in the business with the young independent artist at a particular disadvantage.

Of course, musicians aren’t the only group of artists loosing out on their pay. There are writers, poets and painters that go largely unprotected.

The music business is just easier to track because it has more data. Yet in spite of all the information, the music industry is widely recognized for its lack of transparency. Blockchain technology has the ability to disrupt long-standing industry practices.

ICOs To The Rescue

The number of Ethereum based white knights is starting to appear on the horizon promising to rattle the industry and hopefully restore some democracy on behalf of the independent artist.

One simple business model comes from a startup SingularDTV who is attempting to build their ecosystem on top of Ethereum. Here is the basic value added proposal.

SingularDTV tokenizes the artist work. In doing so the artist is turning their music into a financial asset. Anyone who buys into an artist’s token owns a share of the creation and its income stream. The more people consume an artist creation, the higher goes the token price.

Only time will show if SingularDTV succeeds with this model. The consequence of this model is how it eliminates many of the middlemen and nefarious influences in the industry. Instead of singing on a street corner for bread, an artist could raise money upfront without relying on an advance from a record label.

According to SingularDTV, distributing content via blockchain would allow artists to skirt streaming platforms like Spotify to earn royalties on their own terms. Now that is true democracy.

SingularDTV may stand out a bit in the news due its recent ICO success in raising $8 million but they aren’t the only player in the music game. Names like Voise recently raised $1 million as well as Soundchain, Blokur and Opus to name a few.

I am no longer a registered investment advisor, which means I don’t go around making investment recommendations. So I will only suggest this group to put on your list of late night reading. Next time, I will take a closer look at more of these names.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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