Dollar Draws on Many Sources to Extend 14-Year High

A Not So Surprising Charge

After scarcely dual years of consolidation, a Dollar (ICE Index) was finally driven to a vicious bullish dermatitis in a final months of 2016. To many, a matter for a resurgence came as a surprise: a US Presidential election. The astonishing win by Republican hopeful Donald Trump defied renouned opinion polls and helped a Greenback overcome a viewed limitations. The new President is seen as a claimant committed to poignant change, and his surprising debate promises reason astonishing advantages for a currency. Talk of a large mercantile impulse module bolsters expectations of suggestive enlargement while vows to moment down on perceived, astray trade advantages for vital peers charges acceleration expectations. That translates into higher enlargement forecasts and a Federal Reserve encouraged to accelerate a rate travel regime. Heading into a new year and presidency, a upkeep of and prolongation to a Dollar’s considerable longhorn trend now rests on these singular connectors entrance to pass – or a many some-more thespian predestine befalling a financial system.

Big Promises and Big Expectations

While a US economy is not on a exile pace, it has yet proven strong over a years while other vital economies have wavered. In this sourroundings where ardour for lapse is so prominent, a rival mercantile gait can pull collateral as straightforwardly as a executive bank rate travel – and critically, some-more consistently. The pledge of mercantile impulse targeting infrastructure could significantly enlarge a gait of enlargement and serve pull contrariety to those countries that have stagnated. The capitulation and sum of a module sojourn to be seen, yet a grade of suppositional expectancy is already labelled in.

Just as estimable in a pledge – yet carrying distant larger risk – is a incoming President’s vouch to confront what many see as astray trade advantage. Tariffs on certain imports and taxation breaks on certain exports are dual options that have been floated in sequence to accomplish a rebalancing. This anti-trade change is also a means for appropriation a aforementioned mercantile impulse as good as designed taxation breaks. In an ideal world, this could infer a offset effort. However, there are many ways that this bid can infer a risk for a US and tellurian economies. The United States is a world’s largest consumer economy, and a pierce to cut a expenditure of trade partners’ exports represents a vicious hazard to their economies. It is not irrational to design plea for such a move. If a world’s largest and second largest economies (US and China) were to rivet in undisguised trade wars, a repairs would not be singular to these dual countries. In such a situation, US enlargement would approaching humour and a Dollar’s seductiveness would be significantly diminished.

Rate Forecasts Have Firmed yet Still Present Opportunity Short of Fed’s Projections

While a pledge of a some-more strong economy is a pull for investment and thereby push for a currency, it is conjecture of seductiveness rate hikes that provides a unsentimental expectancy for return. The Federal Open Market Committee (FOMC) hikes rates for a second time in a really nascent hawkish regime on Dec 14th. That represented a 12-month opening between moves, yet a second boost was full expected. Heading into a two-day meeting, a marketplace had entirely labelled in a hike. The hawkish winds were serve carried by a forecasts for seductiveness rates over a entrance 3 years. In particular, a organisation increasing a expectancy for hikes in 2017 from dual to 3 25 basement indicate moves. That was a initial time in 18 months that a executive bank had increasing a forecasts.

Dollar Draws on Many Sources to Extend 14-Year High

Chart prepared by John Kicklighter, Chief Currency Strategist for DailyFX.com. Data Source: Bloomberg

Having already modernized to a 14-year high with vicious breaks – like a EUR/USD pierce next 1.0400 – it would seem that a marketplace is already sincerely reflecting a value of this elemental theme. However, there is still copiousness of event to fuel gains for a greenback underneath a correct circumstances. Despite a executive bank’s foresee for a accumulative 75 basement points of value of tightening by a entrance year, a marketplace is usually pricing in during many 50 basement points according to Fed Funds futures. Should information and tongue continue to support a hawkish outlook, joining of expectations can extend a Dollar’s gains. Then again, if information falters and/or a Fed drags a feet, doubt can eat divided during what is already labelled in and give poignant balance for a retracement.

Safe Haven or Risk Currency?

Though it hasn’t evoked this purpose in some time, it is critical to remember that a Dollar is an ultimate protected breakwater asset. Yet, to truly take advantage of that position, a fall in view would need to be market-wide and intense. As it happens, a assuage grade of suppositional moody would approaching harm a Greenback as it would quell rate expectations. In fact, by a past dual years, a association between a DXY Dollar Index and VIX has flipped a normal association to an surprising different relationship. A solid march for a tellurian financial complement and economy would bode good for a Dollar by rate conjecture while heated risk hatred could recharge a long-dormant and significantly undervalued theme. In between these extremes though, a banking could really good struggle.

Dollar Draws on Many Sources to Extend 14-Year High

Chart prepared by John Kicklighter, Chief Currency Strategist for DailyFX.com. Data Source: Bloomberg

Technicals: USD Rally Looks Mature. Time for Reversal?

Let’s start with some technical comments from a Q4 2016 outlook. “There have been 3 USD longhorn markets given a finish of Bretton Woods. The 1978-1985 convene lasted 76 months and a 1992-2001 convene lasted 106 months. The 2008-2015 convene lasted 93 months (the normal of a before 2 is 91). Simply, a time is right for a change. Strength above a Jul high during 97.56 would during slightest check a bearish call.” Delayed!

Dollar Draws on Many Sources to Extend 14-Year High

The DXY convene has now pushed above a 61.8% retracement of a 2001-2008 decrease (101.80). From my perspective, a time component of a cycle is many interesting. The convene from Mar 2008 is now in a 105th month (as of Dec 2016). There have been 2 longer USD cycles; a 1992-2001 convene lasted 106 months and a finish of Bretton Woods to 1978 decrease lasted 109 months. So, a time component is mature.

Watch a parallels on a weekly chart. As prolonged as cost is above a line that extends off of a Mar 2015 high, it’s insincere that a blow-off pierce is underway. The enlargement of a Mar 2015-May 2016 operation yields 108.87 (measured move). Also be wakeful of a 38.2% retracement of a DXY life during 106.61. This latter cost coincides with a 1989 high. The beginning pointer that a tip could be in place occurs on a dump behind next a slope line that extends off of a Mar 2015 high. The setup would be a same as a Jul 1999 and Jul 2001 tops (circled areas on a weekly chart).

Dollar Draws on Many Sources to Extend 14-Year High

Finally, a figure of a rallies from 1992 and 2008 are matching and a call depends competence finish adult as identical. Proposed call C now subdivides into 5 waves that indicates high risk of a top. It’s remarkable too that call 5 already equals call 1 (in points…not %) during 103.32. The angle of a rallies on a monthly record draft are tangible by a B-2 line. The median lines for both sequences were support for waves 4 of C. After a 2001 top, a median line was support on a initial leg down and a mangle of a ML signaled a conflict of a bear. Watch for something similar.

Written by John Kicklighter, Chief Currency Strategist and Jamie Saettele, CMT, Senior Technical Strategist for DailyFX.com

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