US Dollar Ends Another 9-Yr Down Cycle

by Ashraf Laidi
May 17, 2013 12:34 | 43 Comments

Recent rallies in Non-USD currencies resulting from poor US data have not lasted long. And those rallies resulting from strong US figures via the indirect effect of rallying equities (risk-on) have not lasted either. Broadening pro-USD sentiment may stay for longer than we had thought as the US dollar index has exited from another 9-year down cycle.

The greenback has primarily been boosted by traders' realization that the Federal Reserve is the central bank most likely to precede its global peers in reducing its asset purchases program, regardless of whether it ends up not maintaining or increasing the program altogether. What matters in currencies are relative expectations, and at the present juncture, the Fed is the most likely to signal a gradual tapering of asset purchases, than other major central banks—even if such tapering isn't expected to take place until next year.

The case of the Bank of Japan is well known. Aiming to double monetary base from ¥135 trillion to ¥270 trillion within 2 years; raising the average maturity of Japanese Government Bonds to 7 years from 3 years—all via a monthly expansion of its balance sheet to the tune of 1.1% of GDP—compared to 0.5% of GDP by the Fed. And if that were not enough to drag down the currency, BoJ governor Kuroda is immensely experienced with verbally guiding the currency after his days 4-year stint at the MoF's International Affairs division.

The European Central Bank's avoidance of quantitative easing had been partly the result of improving market metrics relieving the stress off peripheral bond yields. Spain was spared the sacrifice of imposing deeper austerity policies as a condition to get more ECB bailout after its 10-year bond yields tumbled 50% off their July highs. With market metrics in better shape, the ECB is now occupied with deepening recessions throughout the bloc; 6th consecutive quarterly GDP contractions in the Eurozone, 7 straight contractions in Italy and the second quarterly decline in France. Chatter of negative ECB interest rates may end u being just than mere talk or currency jawboning. The euro is increasingly seen as a selling of the bounce rather than buying the dip.

The Bank of England has not added to its £375 bn asset purchase in nearly a year. The BoE has already raised questions about its own credibility after failing to bring inflation towards the 2.0% target for the past 40 months. Such failure had been highlighted by the fact that GDP growth posted 4 quarterly contractions during the 40-month period. This implies that upcoming BoE governor Mark Carney will do away with the 10-year practice of targeting EU-harmonized CPI of 2.0%, in order to focus on the job of more aggressive stimulus policy. And thus, markets anticipate at least more of the same in the way of quantitative easing, at the expense of sterling. 

Commodity currencies are already being hit by the comprehensive damage in the commodity complex damage (Nat Gas is the only commodity up in double digits this year, while most metals and iron are down double digits with the exception of palladium). The Reserve Bank of Australia cut interest rates to 53 year lows, while the Reserve Bank of New Zealand resorted to admitting that it sold its own currency. This leaves the Bank of Canada as the exception in avoiding asset purchases, so far. But this month's appointment of the head of Canada's export agency at the helm of the Bank of Canada means that Canadian exporters will finally find an ally at the central bank. Stephen Poloz is likely to be more attentive to the needs of exporters via capping the Canadian dollar, which was not the case with Mark Carney. And as anecdotal evidence of swelling Canadian household debt becomes a legitimate banking concern, the combination of weak commodities and questionable loans quality is not conducive to a tight monetary policy.

The US dollar index may well be pressured by continued policy easing, but the role of relative expectations across G7 policy accommodation, US energy savings and asset market channels suggest that upside is the logical route and 88.0 on the USD index to finally be tested after a 3–year absence.

Click To Enlarge
US Dollar Ends Another 9-Yr Down Cycle - Usdx May 16 (Chart 1)

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Comments (Showing latest 10 of 43) View All Comments
Central, Egypt
Posts: 0
5 years ago
Mar 21, 2019 13:29
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Posts: 0
5 years ago
Mar 8, 2019 19:48

Dow Theory Conclusions

The goal of Dow and Hamilton was to identify the primary trend and catch the big moves. They understood that the market was influenced by emotion and prone to overreaction both up and down. With this in mind, they concentrated on identification and following: identify the trend and then follow the trend. The trend is in place until proven otherwise. That is when the trend will end, when it is proved otherwise.
Dow Theory helps investors identify facts, not make assumptions or forecast. It can be dangerous when investors and traders begin to assume. Predicting the market is a difficult, if not impossible, game. Hamilton readily admitted that Dow Theory was not infallible. While Dow Theory may be able to form the foundation for analysis, it is meant as a starting point for investors and traders to develop analysis guidelines that they are comfortable with and understand.
Reading the markets is an empirical science. As such there will be exceptions to the theorems put forth by Hamilton and Dow. They believed that success in the markets required serious study and analysis that would be fraught with successes and failures. Success is a great thing, but don't get too smug about it. Failures, while painful, should be looked upon as learning experiences. Technical analysis is an art form and the eye grows keener with practice. Study both successes and failures with an eye to the future.

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Central, Egypt
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5 years ago
Feb 19, 2019 4:22
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LAUSANNE, Switzerland
Posts: 531
8 years ago
Dec 15, 2016 9:58
Trumponomics should looks like Reaganomics, so I consider that we will see a massive USD rally under Trump administration
Charlotte, United States
Posts: 0
9 years ago
Nov 7, 2015 13:08
In reply to Dave P's post
Dave: So after the dollar collapses, what will be the reserve currency? The Yuan? Or do you believe that none of them will and we will all go back to bartering to survive?

Dave P
washington, United States
Posts: 0
9 years ago
Nov 6, 2015 14:39
With all the factors going around the world, the survival of USD is looking a bit skeptical. Following the big countries like China, where the stock market crash did affect the US market.
Frankly speaking The US Dollar was the reserve currency around the world post WWII but look at it now being on the verge of collapse.
Finally the things have changed now since china is on the verge of being a global trading destination and the strategy of China in Stock market crash of onsite and offsite Yuan valuation has make it subtle and in the race to be a reserve currency. Now Implying and taking this factors into account the US Dollar Collapse 2016 is looking eminent to me.
Woking, UK
Posts: 0
9 years ago
Jul 25, 2015 6:36
In reply to elephantclash's post
Hi elephantclash, I am trying to get feedback on £-aud and also $-aud - since AUD is downgraded then £-aud and $-aud is LONG but up to where? do you look at the monthly candle and put fib retracements - that would mean £-aud is heading back towards 3.00000 - it is now 2.40731 - but about to hit 200 ma - your opinion/feedback will be much appreciated. Thank you
New York City, United States
Posts: 0
9 years ago
Jul 2, 2015 11:58
again a downgrade !!
New York City, United States
Posts: 0
9 years ago
Jun 29, 2015 16:35
Where is the analysis?
New York City, United States
Posts: 0
9 years ago
Jun 23, 2015 16:06
I am unable to see the thread content please help me with that.