jueves, 17 de agosto de 2017

jueves, agosto 17, 2017

The Sinking Dollar Has Not Reached Its Bottom

by: Andrew Hecht

- A fall from the highest level since 2002.

- A bull market in jeopardy.

- The rise of the euro follows a familiar pattern.

- The administration wants the dollarlower.

- Where is the bottom?

 
The dollar is the reserve currency of the world, which makes it the benchmark pricing mechanism for raw materials. The United States' long reputation as the richest and most stable nation on earth is the reason that central banks all over the world hold dollars as reserve assets.
 
The dollar embarked on a bullish run starting in May 2014. Over a ten month period, the U.S. currency rallied by over 27% from under 79 to over 100 on the dollar index. The dollar appreciated against almost all other currencies during that period. The greenback then spent the next twenty months consolidating near its highs trading in a range from 91.88 to the 100.60 level on the dollar index until November 2016 when it moved above the top end of its trading range. The dollar reached a peak at 103.815 on the index at the beginning of January 2017 which was the highest level since 2002.
 
The decade and a half high in the dollar index was a technical breakout, but it turned out to be a pinnacle for the currency which has since turned lower, and over recent months the currency has made lower highs and lower lows with the downside action picking up a head of steam over recent weeks.

A fall from the highest level since 2002

The descent of the dollar has been almost as impressive as its ascent from May 2014 through March 2015, and it may not be over yet.
 
Source: CQG
 
 
As the weekly chart highlights, the dollar index has dropped from 103.815 in early January to lows of 93.00 on July 27, a decline of 10.4% in a little under eight months. A ten percent move in a currency is a significant move, and it is now approaching a level that puts the long-term bull market in the greenback in jeopardy.

A bull market in jeopardy

The technical line in the sand for the dollar index now stands at the May 2016 lows of 91.88.
 
Below there, the dollar could find itself in a technical free fall as it is the only standing level left from the long consolidation period that occurred from March 2015 through the January 2017 highs.
 
An end to the bull market in the dollar will have far reaching implications for markets across all asset classes. When it comes to stocks, a lower dollar will support earnings for multinational companies as it makes U.S. exports more attractive on global markets. In the bond market, the lower dollar represents a total lack of sensitivity to rising short-term interest rates as a result of Fed rate hikes. Moreover, the Fed's plans to tighten credit by allowing the legacy of QE to the tune of $50 billion per month in debt to roll off its balance sheet. As foreign exchange markets tend to be highly sensitive to interest rate differentials, the price action in the dollar reveals the underlying weakness in the U.S. currency.
 
In the world of commodities, a lower dollar usually is bullish for raw material prices, and we have seen some commodities begin to move to the upside as the value of the dollar has declined.
 
A fall below technical support in the dollar index at 91.88 could trigger market adjustments across all asset classes. Meanwhile, the weakness in the dollar is a result of strength in the euro currency after elections that solidified the European Union and future of the euro in 2017.

The rise of the euro follows a familiar pattern

The elections in the Netherlands and France this year did not follow the trend of a rejection of the status quo that began in 2016 with the Brexit referendum and U.S. election. The future of the Union and euro currency survived as pro-EU candidates were victorious. The next election in Germany seems to be a fait accompli with German Chancellor Angela Merkel apparently coasting to an easy victory and fourth term in September.
 
With politics out of the way for the European Central Bank, President Mario Draghi has been hinting to markets that QE will come to an end soon and the ECB will begin to taper bond purchases. At the same time, with interest rates at negative forty basis points in Europe, the path of least resistance is logically higher. The rally in the dollar began in May 2014 when the Fed began to taper QE and began to hint about interest rate hikes. In many ways, Europe is now in the same position as the United States was in back in May 2014. The euro found a bottom in December of 2016 and has been rallying since.
 
Source: CQG
 
As the weekly chart of the euro versus dollar currency relationship illustrates, the euro hit a low of $1.03675 in December 2016 and has rallied to highs of $1.1808 on Thursday, July 27. The currency is up 13.9% since last December. Moreover, the euro rose above its line in the sand on July 25, which was critical technical resistance at $1.1718, the August 2015 highs in the euro and now the sky appears to be the limit for the European currency when it comes to the charts.
 
The next stop for the euro could be the $1.20 level, which would likely put the dollar index at or below the 91.88 support level and could lead to a massive currency adjustment between the two foreign exchange instruments. The dollar index closed near the lows last Friday at 93.114 on the September futures contract and the euro was trading at the $1.1778 level.

The administration wants the dollar lower

President Donald Trump and his Treasury Secretary Steve Mnuchin have made no secret of their desires to see the dollar move to a lower level. To "Make America Great Again" and improve trade deals with other nations, a lower dollar will make U.S. exports more attractive on world markets, which will lead to a more favorable balance of trade for the United States.
 
The weak dollar policy is a departure from past administrations who advocated for just the opposite as a strong dollar represents American stability and fosters the illusion of the U.S. as the world's richest and most powerful nation.
 
However, President Trump campaigned on a platform of a wholesale overhaul of all existing trade agreements, and a lower dollar would put him in a better position when it comes to negotiating with other countries around the world. China had been devaluing their currency, and the President has often threatened to label the Chinese government as currency manipulators. A lower dollar plays right into the President's hands when it comes to negotiating trade. Therefore, with the trajectory of the technical trend in the dollar pointing lower, a rising euro currency, and an administration that favors letting the greenback fall, it may be that 91.88 will be just the first stop for the dollar as the over three-year bull market comes to an end.
 
Where is the bottom?
 
It is currently challenging to project a bottom for the dollar or a top for the euro currency. The euro has moved above its technical resistance area, and on the charts, it looks like there are more gains on the horizon. The dollar has not yet broken to the downside, but it is likely just a matter of time before a test of the 91.88 level. The dollar moved 27% from its lows in May 2014 in ten months. The euro is now in its eighth month of a rally, and a 27% rise would take the currency all the way up to the $1.3167 level against the dollar which seems unlikely. While economic conditions have improved in Europe, the southern countries like Italy and Greece remain financial nightmares, and many of the problems that led to Brexit like immigration issues and terrorist threats remain factors that weigh on the European economy.
 
I believe that the current adjustment in the currency markets will find a level where stability returns to exchange rates, and that may be somewhere around the $1.20 to $1.25 level on the euro versus dollar exchange rate. At that level, the dollar index will find itself below support at 91.88 and possibly under the 90 level for the first time since 2014. While commodities prices are currently watching both the dollar and the prospects for higher interest rates in the future, I believe that it will be a weak dollar that causes the path of least resistance for many raw materials to move higher causing inflationary pressures to increase in late 2017 and into 2018.
 
The dollar continues to sink against other world currencies, much to the delight of the U.S. President. The bottom for the world's reserve currency is not yet in sight, and it may wind up finding its nadir under 90 on the dollar index. Fasten your seat belts because a break in technical support for the greenback will likely reverberate across all asset classes over the coming months.

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