Many traders got “spooked” this past week as the dollar rallied (since they had a bearish view overall). Others, think this is a new sign of a re-emergence of the dollar rally.
So what’s the “real deal”? The dollar is in a bear market now. However, ALL bear markets do have rallies higher. This one is no exception.
Why do I believe that the dollar is in a bear market rally right now that will turn downard within the next couple of hundred pips or so on the U.S. Dollar Index? A few reasons…the technicals show a downtrend, plus the sentiment for the dollar is negative and there’s no inflation yet to support rate hikes.
So let’s look at each of these issues in more detail. First we’ll take a look at the chart of the U.S. Dollar Index below.
Short Term: Dollar Bounce could continue; Long Term: Dollar will tank!
You will see from the chart above that the dollar is in a downtrend “any way you want to slice it”. For instance, the major highs are now lower and so are the major lows. The dollar is also trading below BOTH the 50 and 200 Day Simple Moving Averages (bearish sign). The 50 SMA has crossed below the 200 SMA, a further bearish sign.
The Slow Stochastics are almost to “overbought levels” again (bearish sign) and the MACD continues to head lower and most imporantly right now, it registers below its zero line (more bearish signs).
With that said though, the dollar could rally a bit further (as noted by the green line on the chart) before it heads south once again (as noted by the red arrow on the chart).
So that’s the first reason: the downtrend on the charts. There are old Wall St. sayings that say to “never buck the trend”,…the trend is your friend…trade the trend until it ends…etc. These all mean…whichever way the dollar is heading, trade in that direction and assume it continues until it proves to you that the trend has ended by breaking the downtrend. This can be seen by drawing a downtrend line on your chart or by simply seeing the dollar climb above the major moving averages on the chart.
The next reason for the “dollar decline” is that there is no inflation to drive up interest rates yet! Oh there is inflation in the world right now. However, it’s not in America right now. This can be seen by the year over year figures for the CPI (Consumer Price Index) that tracks the cost of goods on the consumer level.
New Zealand, Australia and the U.K. have Inflation! Not the U.S.!
As you can see from the chart above, consumer prices are rising due to inflation in several coutnries (mostly in New Zealand, Australia and the U.K.). There’s even mild inflation in the Euro Zone and Canada. However, you can quickly see where the numbers flip into the negative. This means that consumer prices are actually “back peddling” and are shrinking. This is happening in Japan, Switzerland and the U.S. So these are places that don’t presently have inflation.
Inflation has to be tackled (eventually) by having high rates (thus rate hikes). So this is why both Australia and New Zealand have held their rates much higher and it’s also why they may be some of the first to hike rates much sooner than the U.S. will.
Most central banks get very uncomfortable once their inflation tops the 3% level. The U.S. has a ways to go before even getting back to 0% much less inflation growing at 3%.
Since money is attracted to higher yields, it has no reason to desire the greenback right now unless we were to double dip back into a global recession. Aside from that defensive move, there’s no reason to want to buy U.S. dollars when you could be in a country that actuually has growth (shown through a positive GDP) and that has inflation and has higher interest rates: namely, Australia.
The third reason is “sentiment”. The sentiment has recently turned negative in the last couple of months as Obama puts into practices that are horrible for capitalism and growth. The sentiment has also turned negative due to all of the “money printing” that has taken place which dilutes the value of the dollar. Also, the sentiment has turned negative due to all of the debt that the U.S. has recently racked up.
On top of all of these worries, other countries are starting to make some changes to account for all of the troubles the U.S. is having. China, for instance, has started to buy commodities and commodity mining/exporting companies as a way to diversify their (almost) $2 trillon of dollar reserves which are declining in value.
Both Russia and Brazil bought $20 billion in International Monetary Authority (IMF) bonds recently as a way to diversify some of their reserves away from the dollar.
Also, Brazil and China are now doing some trade in yuan rather than dollars. China and Russia just inked a deal to where they will do some bilateral trading in rubles and yuan rather than using the dollar.
Russia is also working on a deal with China to where China will buy oil in rubles and not dollars.
While all of this takes time to put into action, the negative sentiment from it starts immediately!
Meanwhile, over the next 20 years, it’s anticipated that China will need approximately $100 billion worth of oil during that time. However, if they don’t buy it in “dollars” and choose another currency like rubles, then the dollar will fall even further.
All three of these points, point to a “dollar negative” bias. Thus, traders would be better off buying AUD/USD, NZD/USD and GBP/USD on big pull backs as a way to circumvent the fall of the dollar.
AUD/USD: likely a buy after this pull back!
U.S. consumers really need a “dollar hedge” such as these pairs so that as costs go up eventually, due to the fall of the dollar, they will have gains in their currency accounts that help to offset these rising costs. Otherwise, the money you make will erode in value and won’t go nearly as far as it used to.
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