Connect with us

Analysis

Will the US dollar fall off the cliff?

Published

on

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.

// -- Discuss and ask questions in our community on Workplace.

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.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

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.




Feedback or Requests?

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.

You must be logged in to post a comment Login

Leave a Reply

Analysis

Crypto Update: Ethereum Tops $550 as Altcoins Hit New Rally Highs

Published

on

The major coins are having another bullish day after a consolidation period with all of the top 10 cryptocurrencies sporting meaningful gains. Altcoins are leading the charge higher, as the switch in relative strength that we pointed out several times seems to be a lasting phenomenon, with the ETH/BTC pair confirming a short-term uptrend.

// -- Discuss and ask questions in our community on Workplace.

BTC/USD, 4-Hour Chart Analysis

Bitcoin is also up today, but while the majority of altcoins are trading on new rally highs, BTC is stuck below the prior swing high at $8400, which is also a previously established resistance level. The dominant declining trendline is also in that area, and that strong zone could hold back the largest coin for a longer period. A breakout would confirm a new rising short-term trend, with the next major resistance zone ahead between $9000 and $9200.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

ETH/USD, 4-Hour Chart Analysis

Ethereum is among the strongest coins short-term, and with smaller cap altcoins also joining the rally, the whole segment could be ready for a move higher. That said, the broader declining trend is still intact with the coin trading in a strong resistance zone between $555 and $575. A new short-term uptrend is now confirmed but with the declining trendline just ahead, the coin could be in for volatile swings in the coming days. The next target zone is at $625, while support is found at $500 and $450.

Broad Altcoin Rally Lifts All Ships

XRP/USD, 4-Hour Chart Analysis

Ripple, which was among the weakest majors for a prolonged period is one of the leaders today, climbing above $0.75, and eyeing the next major level at $0.84, with tbe coin already being above the previously dominant declining trendline.

On a slightly negative note, correlations are still high between the majors, but there are standout performers despite the concerted rally. Among the long-term leaders, Litecoin is trading near $150, while Monero added to yesterday’s gains, and it’s testing the $240 resistance as we speak.

The early leaders of the rally are slightly lagging in the current short-term swing, but that is likely a sign of rotation, as the likes of EOS, NEO, and IOTA are also higher today, while holding up wrll above the correction lows.

With all of the majors on buy signals in our trend model, we expect the rally to continue even as strong resistance zones are ahead and the road will likely be bumpy after the steep and lengthy downswing.

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
1 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 5 (1 votes, average: 5.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.5 stars on average, based on 224 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.




Feedback or Requests?

Continue Reading

Analysis

Rally Fades in Stocks as Apple Weighs on Nasdaq

Published

on

We warned yesterday that stock markets got vulnerable as the major US indices reached short-term overbought readings, and after a choppy Wednesday session, equities turned lower today in early trading. Apple fell by more than 2% in early trading on a supplier report regarding declining orders from the smartphone giant, and the sliding stock dragged the tech segment lower.

// -- Discuss and ask questions in our community on Workplace.

S&P 500 Futures, 4-Hour Chart Analysis

While the short-term technical picture deteriorated, the losses are muted so far, and the rising short-term trendlines are holding up. Volatility ticked higher, with the VIX bouncing off its two-month lows, but the index is well below the levels seen in the beginning of the month, as Syria-related fears continued to ease and the Chinese-US trade spat also took the back seat in the mainstream media.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

DAX, 4-Hour Chart Analysis

Stocks finished broadly lower in Europe, while Asian equities reversed their early gains, with trading volumes still being low across the board. The economic calendar was almost empty today, with only the much worse than expected British retail sales figure adding to the string of negative surprises coming out form the UK this week. In the US, the Philly Fed index came in higher than expected, while weekly jobless claims were in line with expectations.

Dollar Stable as Short Yields Hit New Highs

2-Year Treasury Yields, 4-Hour Chart Analysis

Treasury yields resumed their rise in the quiet environment, and as the short end of the curve continues to outperform the flattening of the yield curve continues in earnest. While forex markets are still mostly flat, the Dollar is drifting higher against most of its peers in US trading.

AUD/USD, 4-Hour Chart Analysis

Commodity-related currencies are little changed, although both the Aussie and the Canadian Dollar are off their recent highs, and should they roll over, the bullish case would receive another hit.  Despite the weakening of the risk rally, crude oil continues to hit multi-year highs, with the WTI contract getting close to the $70 per dollar level today. Gold fell back below $1350, as the choppy consolidation pattern is still intact, and the slight risk-off shift wasn’t enough to trigger meaningful safe-haven flows.

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.5 stars on average, based on 224 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.




Feedback or Requests?

Continue Reading

Analysis

More Chance to Go Up for Litecoin

Published

on

Litecoin short term outlook is quite positive, while in a longer term, it’s somewhat mixed. Shortly, the digital coin may face a very strong resistance at $141, being currently priced at $140. As Dmitriy Gurkovskiy, Chief Analyst at RoboForex, says, Litecoin already tried to test this level earlier this week, but did not succeed.

// -- Discuss and ask questions in our community on Workplace.

In the mid-term Litecoin is trying to break out the current range, and in case it finally manages to break out $141 and stay above, it may go up to $168. Before reaching this target, however, another downtrend may be formed, with Litecoin plunging to the support at $114 again. If the bears succeed in breaking out this level, too, another sell-off target will be at $87.

Current outlook, however, is mostly positive, with the key support being at $114 and the key resistances at $141 and $168. The MACD on D1 is in its negatives, but is going up, issuing a buy signal, while the Stochastic is in the positive area and confirms its buy signal, already issued some time ago.

Fundamentally, Litecoin has got much support this week. The market started buying out the coin once the news on the token being listed at Korbit appeared. As the recent reports say, the crypto started being traded on Korbit yesterday, while withdrawal should be available starting today, Apr 19. This is important for Litecoin: first, Korbit is one of the oldest and most reliable exchanges in Korea; second, as we have already stated a few times, if the crypto becomes widespread across multiple exchanges, its liquidity gets boosted, while the accessibility simplifies the transaction processes.

// -- Become a yearly Platinum Member and save 69 USD and get access to our secret group on Workplace. Click here to change your current membership -- //

Korbit decided to hold a contest, with the top 6 LTC/KRW traders getting prizes in Litecoin (the winner gets LTC 50, the runner-up will walk away with LTC 25). Meanwhile, Litecoin being available on Korbit also helped the crypto to rise on Bitfinex.

Currently, Litecoin is one of the most volatile currencies, mostly because of it always being in the news, which does good to its promotion. As such, it was announced a few days ago that LTC would be used as a payment method, and TenX already started developing a prepaid card for that purpose.

By: Dmitriy Gurkovskiy, Chief Analyst at RoboForex

Disclaimer
Any predictions contained herein are based on the authors' particular opinion. This analysis shall not be treated as trading advice. RoboForex shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

I have two degrees in Social Psychology and Economy. After graduation I worked as the Head of the Laboratory of Technical and Fundamental Analysis of Financial Markets at The International Institute for Applied Systems Analysis. The experience and skills he gained helped me to realize my potential as an analyst-trader and a portfolio manager in an investment company. At the moment I'm a financial expert, writing for various financial media sources and a Chief Analyst at RoboMarkets.




Feedback or Requests?

Continue Reading

Recent Comments

Recent Posts

A part of CCN

Hacked.com is Neutral and Unbiased

Hacked.com and its team members have pledged to reject any form of advertisement or sponsorships from 3rd parties. We will always be neutral and we strive towards a fully unbiased view on all topics. Whenever an author has a conflicting interest, that should be clearly stated in the post itself with a disclaimer. If you suspect that one of our team members are biased, please notify me immediately at jonas.borchgrevink(at)hacked.com.

Trending