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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.

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.

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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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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2 Comments

2 Comments

  1. Finch

    August 4, 2017 at 7:13 am

    Very good, thank you for your insights!

    • Rakesh Upadhyay

      August 4, 2017 at 12:00 pm

      Hello Finch,

      Thank you for the encouragement.

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Analysis

Crypto Update: Divergence Deepens as Altcoins Fall, Bitcoin Flat

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The unusual discrepancy between BTC and the rest of the cryptocurrency market continued today, with the top 10 coins all losing ground with the exception of Bitcoin itself. Tuesday’s surge, which carried the segment to $300 billion in total market cap quickly fizzled out, at least as far as the major altcoins are concerned, but the largest digital currency is still holding on above the strong $7000 and $7350 support/resistance levels.

Altcoins are on short-term sell signals according to our trend model, but Bitcoin is still on a buy signal as the declining trend was broken by the break-out that remains intact, despite the segment-wide weakness.

Given the mixed, but one-sided setup, and the lack of bullish follow-through, odds still favor a bearish outcome, and traders should remain cautious with new positions here, even in BTC, the positive outlier. A broad trend change would require a meaningful leadership, and until that develops, a test of t eh June lows remains likely, with the possibility of new lows in the coming week as well.

BTC/USD, 4-Hour Chart Analysis

While Bitcoin failed to durably stay above the $7500 level, bulls successfully defended the support zone near $7350, despite the overbought short-term momentum readings. The coin is well above the line-in-the-sand $7000 level and the long-term support near $5850 that was in danger just one week ago.

Although the altcoin weakness makes BTC’s rally suspicious, the short-term bullish pattern is intact, as is the buy signal in our trend model. Further support is found at $6750, and $6500, while primary resistance is still ahead at $7650.

Selling Pressure Apparent in Altcoins

ETH/USD, 4-Hour Chart Analysis

All intraday rally attempts have been sold so far in most of the major altcoins, and Ethereum is just holding up above primary support at $450 despite the rally in the beginning of the week. The coin is on a short-term sell signal, and a test of the June lows is likely after the failed break-out. Strong resistance is ahead at $500 and between $555 and $575, while support is found at $420, $400, $380, and $360.

XMR/USDT, 4-Hour Chart Analysis

While Monero has been holding up relatively well in the last couple of days after getting stuck below the $150 level during the Tuesday surge, but the coin is still among the structurally weak majors, being on a long-term sell signal. As the other bearish leaders, NEO, LTC, and Dash are also trading below key long-term levels, we expect the coin to fall back below the $125 support and likely test the June lows in the coming weeks.

XRP/USDT, 4-Hour Chart Analysis

The third largest coin Ripple is already testing the $0.45 level after drifting lower ever since the Tuesday rally, and as its relative weakness is still clear, a break below that level seems to be imminent. Below that, the crucial long-term support zone near $0.42 could stop the decline of XRP again, but a move under that could trigger a long-term sell signal.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

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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4.6 stars on average, based on 297 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Forex Update: Boring Means Long-Term Sustainability for EUR/INR

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Billionaire investor George Soros once said, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” As an experienced investor, I couldn’t agree more. There’s a lot of waiting and sitting involved but that’s how money is made in investing. The Euro/Indian Rupee (EUR/INR) pair seems to be the perfect embodiment of this quote.

Looking as far back as 1999, it appears that EUR/INR has been in an unstoppable bull run since the second half of 2002. If you invested in the pair a decade and a half ago, you would have more than doubled your money. Chances are you didn’t, but don’t fret because you can always invest today. EUR/INR looks as strong today as it did back then.

In this article, we show how EUR/INR is looking strong on all counts despite being boring.

Healthy Ascending Channel on the Daily Chart  

EUR/INR dropped to as low as 67.9819 on April 10, 2017 and it was nothing but blue skies since. It is trading within an ascending channel as it generates higher highs and higher lows in a sustainable manner. The ascending channel looks healthy, too, as the trading range is not significantly contracting or expanding.


Daily chart of EUR/INR

If you look at the technical indicators, everything is fairly clear. EUR/INR rallies when it flashes oversold readings. On the other hand, it corrects when it is overbought. You won’t find excitement here and that’s good news for long term investors.

Concluded Corrective Wave on the Weekly

EUR/INR started showing signs of weakness in September 2013 when it posted a shooting star weekly candle. The ensuing pullback drove the pair down to the 65 levels in March 2015 (A-wave). The market has not visited that price area since. It managed to generate a bullish higher low setup at 68 (C-wave). This was a clear signal to investors that the correction was over.

Weekly chart of EUR/INR

With a higher low in place, EUR/INR took out resistance of 76. The new support level was tested and retested before the pair mounted a strong rally. On top of that, we can see a hidden bullish divergence on the weekly RSI, hinting that the uptrend is in a good shape.

Even in the weekly chart, the market is not pulling any surprises. There are no false breaks and no shakedowns. You don’t have to look close to see where the market is headed. EUR/INR is boring and that’s why it is strong.

Major Support Line on the Monthly Intact

Conventional wisdom says to buy low and sell high. The problem with this is that you don’t really know when is the market low. The market can go down as there’s always the possibility that a key support can break. That’s just not the case for EUR/INR.

Monthly chart of EUR/INR

Buying low is fairly simple in this case. All investors have to do is to wait for the price to hit the long-term support. Investors can be confident in doing so because the trend line has been intact for over 15 years. More importantly, it bounces every time it hit the support. It’s not really exciting but it works.

Bottom Line

A famous billionaire trader once said that good investing is boring, and I agree. Look at the charts of EUR/INR and you’ll see why boring investing is good.

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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3.6 stars on average, based on 201 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Analysis

Pre-Market: China Tries to Support Markets as Global Stocks Slide

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Yesterday’s risk-off shift continued today in early trading with nervous and choppy trading in Asia and Europe, as global financial markets are still haunted by trade war fears and emerging market weakness. The major US indices rolled over after another period of apparent relative strength, with the Nasdaq being the most robust market once again, while most of the key European benchmarks continue to lag behind.

S&P 500 Futures, 4-Hour Chart Analysis

Chinese assets are still in focus before the weekend, as the Yuan’s recent steep devaluation sparked fears of a credit meltdown in the country. With the largest credit bubble in human history casting its shadow on China, some analysts think that with Trump’s trade war, the bug finally found its windshield and the bubble already started to burst.

USD/Yuan, 4-Hour Chart Analysis

All eyes are on the USD/Yuan pair as Chinese authorities are reportedly intervening in the market of the currency, and most likely local equities as well, trying to prevent a serious run on the most important assets.

With the Chinese stock market already in a bear market, and the Yuan trading at fresh 12-month lows against the Dollar, it might be a bit late to stop the slide, but the intervention could cause spectacular short squeezes.

Italy also made headlines today during the European session, as Italian government bonds got slammed lower, as the future of the new finance minister is uncertain, with another round of political turmoil possibly ahead for Europe’s most vulnerable country.

Unicredit (UCG), 4-Hour Chart Analysis

Looking at the charts of Italian banks, it’s clear that the spring turmoil had a lasting effect on the financial system, as Unicredit is on the verge of hitting a new low, and the other large players also remain under pressure, in part explaining the general weakness in European equities.

Europe Still Far Behind amid Mixed Economic Numbers

USD/CAD, 4-Hour Chart Analysis

The economic calendar is almost empty today with regards to the key markets, as the Canadian Retail Sales and CPI reports are the most important releases. The Canadian Dollar rebounded when the USD entered a correction June, but now the currency edging lower again, as the weakness in commodities and the Greenback’s rally are taking their toll. New highs are likely in the USD/CAD pair in the coming weeks, although strong resistance is just ahead at 1.33.

Commodities are little changed today after yesterday’s volatile session, as the bounce in China helped to stabilize the segment. Notably copper is back above the key $2.70 level, while WTI crude oil is trading at $68 per barrel again, and gold is hovering around $1225.

Featured image from 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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4.6 stars on average, based on 297 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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