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.
- The US dollar topped out in January of this year
- The DXY has fallen more than 10% from its highs and is likely to fall to multi-year lows.
- Most of the fall can be attributed to politics, rather than to a weak US economy
- The US economy continues to be strong and the Fed is likely to continue its tightening cycle
- 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.
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.
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.
Daily Analysis: Dollar Rally Continues amid Fed Chair Confusion
Tuesday Market Recap
|Asset||Current Value||Daily Change|
|WTI Crude Oil||51.53||-0.66%|
Yesterday’s trends are mostly continued in financial markets, such as the low-volatility levitation in stocks and the slightly more active trading in currencies with the apparent Dollar strength. The Great British Pound continued to be under pressure amid the amplified Brexit-related worries, but most of the other majors also lost ground to the Greenback.
The Dollar rally has been fueled by the rise in the odds of some of the hawkish Fed Chair candidates, while overall, the “race” for the positions looks more chaotic than ever. Interestingly, the long-end of the yield curve is refusing to follow the short-term moves, and without the effects of the Fed’s QE program, the yield curve would probably be inverted by now, signaling strong recession risks.
Dollar Index (DXY), 4-Hour Chart Analysis
The major stock indices are virtually unchanged yet again and even the previously surging Nikkei entered a consolidation, adding to the unusual October lull. Commodities have been quite active thanks to the Dollar’s vigor, with crude oil and gold both turning lower. Oil gave back most of yesterday’s gains as the Iraqi-Kurdish conflict turned out to be less violent than previously feared, and the brief rally fizzled.
WTI Crude Oil, 4-Hour Chart Analysis
The major coins are having a mixed session at best, as yesterday’s rebound wasn’t durable, and most of the coins turned back lower again. That said, despite the recent choppy price action, the total market cap of the segment is close to its all-time high, even as only Bitcoin is trading near its own record price level.
The optimism regarding Ethereum major Byzantium upgrade wasn’t enough to lift the second most valuable coin today, and the price of the ETH token retreated below the key $330 level after touching $350 yesterday after the upgrade’s lock-in. Ripple and NEO have been among the most active majors today, but with opposing performances, as Ripple fell significantly after yesterday’s break-out attempt, while NEO defied gravity and jumped above the $30 level after a corrective period.
BTC/USD, 4-Hour Chart Analysis
The S&P 500 is grinding higher despite the overbought short-term momentum readings, and the benchmark is trading very close to its all-time high. The 2550 level is still in focus, but until volatility remains near record lows, the minuscule moves are unlikely to change the technical setup. While a sudden drop in prices could quickly negate the recent break-out, the consolidation could very well lead to further upside, as bulls remain firmly in control, despite the lofty valuation levels.
S&P 500 Futures, 4-Hour Chart Analysis
Key Economic Releases on Tuesday
|02:30||AUSTRALIA||RBA Meeting Minutes||–||–||–|
|15:15||US||Capacity Utilization Rate||76.00%||76.20%||76.10%|
Featured image from Shutterstock
Technical Analysis: NEO Jumps as Broad Markets Turns Lower
As the new waves of regulatory changes keep on hitting the segment, the major cryptocurrencies are mostly lower today. After the major update of Ethereum, and the recent surge in the price of Bitcoin, choppy conditions developed, with no clear short-term trend in most of the coins.
NEO is the best performing major today, as it surged back to the $30 level after a frustrating period that was dominated by a downward drift. The coin is now just below the key resistance level, and it could be ready to test the $34 level, with a further target found at $40. The long-term picture still looks positive, with strong support levels at $27 and $25.
NEO/USDT, Daily Chart Analysis
Ethereum is in a consolidation after the encouraging rally towards the end of last week, while Bitcoin is also correction after its stellar rise. The two largest coins pulled the rest of the majors lower, while Ripple remained very volatile after touching the $0.30 level yesterday, trading below the $0.26 again.
Litecoin, Dash, Monero, and IOTA are all a bit lower today, while Ethereum Classic found some relative strength, although it remains stuck in a declining short-term trend. All in all, the segment is still in a clear uptrend, so let’s see which coins are the most promising regarding the short-term picture.
Daily Analysis: Volatility Near Record Low 30 Years After Black Monday
Monday Market Recap
|Asset||Current Value||Daily Change|
|WTI Crude Oil||51.88||0.82%|
Stocks markets in the US are at a standstill near their all-time highs, with the major indices trading in extremely narrow ranges yet again. Volatility, as measured by the VIX, is close to its all-time high, in stark contrast to the average October readings, as this month is the most negative for equities regarding seasonality. In fact, this October is the least volatile ever so far, while this week is the 30th anniversary of the most volatile day ever on Wall Street.
A Riskless Market?
On Black Monday in 1987, the Dow crashed by more than 23% during one session, as widespread bullishness coupled and novel portfolio techniques lead to a massive wave of selling. Although such one-day moves should be prevented by circuit breaking rules in today’s market, the notion that risk is non-existent in the current environment is as dangerous as it was three decades ago.
VIX, Weekly Chart
Stocks have been very quiet across the globe today, with only the Nikkei continuing its break-out to two-decade highs yet again. In Europe, British assets were the most active, as the Brexit talks seem to be in quite a big trouble, and that pushed the Pound and the Euro lower compared to the Dollar. The Greenback’s rally put pressure on gold as well, and the Japanese Yen also declined, as safe-haven assets were sold in the calm environment.
Nikkei Index, 4-Hour Chart Analysis
Oil has been very active as the Iraqi army took control of Kirkuk defying the Kurdish resistance, the WTI contract rose as much as 2% before retreating below the $52 per barrel level, and as we speculated during the weekend, the spike is unlikely to cause a structural change in energy markets, and we expect the range trading environment to continue in the crucial commodity.
WTI Crude Oil, 4-Hour Chart Analysis
Today was a big day for the crypto segment thanks to the Byzantium update of the Ethereum network, and although the hard fork went smoothly, the session ended on a slightly negative note. Ethereum pulled back towards the $330 support/resistance level, while Bitcoin remained stuck near the $5700 level after recovering from Sunday’s dip.
Ripple has been the other major mover of the day as the coin first surged higher and hit the $0.30 resistance just to fall back swiftly below the $0.26 level towards the end of the day. Despite the decline, the currency is still in a clear uptrend, but more volatile moves are expected in its price. Among the smaller coins, Stellar Lumens more than doubled in price after the announcement of a deal with IBM, as blockchain adoption continues in full force, pointing out the sound fundamentals behind the boom in the segment
ETH/USD, 4-Hour Chart Analysis
Key Economic Releases on Monday
|14:30||US||Empire Manufacturing Index||30.2||20.3||24.4|
Key Economic Releases on Tuesday
|2:30||AUSTRALIA||RBA Meeting Minutes||–||–|
|15:15||US||Capacity Utilization Rate||0.4%||0.2%|
Featured image from Shutterstock
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