I published a series of shorter posts and tweets about the dollar in the past, but didn’t write a more extensive one recently. I was thinking to write a longer post for a while now, but a) just didn’t find time to do it and b) thought we are set for a correction after the selloff in the last half a year or so, so I thought there is no rush with presenting a bearish case. Anyway.. now I think we might not even get a correction yet in this it seems to be the first stage of a major long-term dollar bear market.
Many of my readers probably still remember that I was a vocal dollar bull until the first quarter of this year. After revising the evidence I changed my mind to become a very cautious bull to perhaps even neutral with transferring my dollar deposits into euros, my domestic currency, to now getting to be a bear. Let me present how I see things evolving from now on, starting with some background and later presenting more technical picture.
Let me start with saying something about the 2 year-long dollar consolidation, which happened in 2015 and 2016. A lot of people were expecting this consolidation to resolve higher. The price broke above its trading range resistance briefly, but quickly got rejected lower.
The first chart shows how were the central bankers providing liquidity / stimulating the markets and expanding their balance sheets. We see that in the same period as when the dollar didn’t do anything, the ECB was easing at full capacity, BOJ was doing the same, while the FED was neutral at their asset purchases. Despite this ‘divergence’ in the central banks’ policies the dollar didn’t manage to rally.One could say, but the FED will taper now and started a hiking cycle already. Sure, let them taper. But did you ask yourself that ECB might taper as well? And what if the market forces the FED to start easing again soon, because there is a risk that with tapering the equity market might crash?
On the chart we can also see that the central banks were easing in turns. Assume they continue with this and all taper, would in this case the FED be the easiest of all, because it seems its FED’s turn? Or, what if all don’t taper, is the FED the one to ease next? I’d argue this would have bearish implications on the dollar.
As Mark Yusko would say, the demographics are destiny, we’ve seen the future with Japan and therefore we should expect the FED to keep increasing their balance sheet in the years to come. The next chart shows this very clearly.
Before I move to more technical picture, I have to note that I am aware of the dollar shortage arguments, I also am aware of the European issues (after all I am European),… but despite this it seems to me the dollar is destined to fall in the long run.
Now, the most important currency pair in the dollar index DXY is the EURUSD pair. I want to show you a monthly chart. We can see that the market clearly rejected the attempt of a multi decade trendline (in green) breakout to the downside. Not only that, but soon after EURUSD broke higher of the wedge in black. Both actions indicate that EURUSD could rally significantly.
We got another warning signal in April [see here], when dollar index was breaking lower of its corrective wedge. That should have been the last signal to all the bulls that something is wrong.
The price broke an important resistance at 1.13 yesterday which makes the path of least resistance up until at least around 1.17 level now, where the next major resistance lies. Should the price get there and break higher, doors will even open for the price to go to 1.40 or even higher in the long-term.
If we now move to another dollar pair, to see what’s happening underneath the index, the cable looks like is bottoming too. Yesterday the price got above the crucial level at 1.28 and until the price completely falls apart (below 1.25), it will be hard to construct a bearish case if you ask me.
And then there is USDCAD. I wrote about the CAD and oil recently. I won’t go into too much details, so please read more here. I just want to show you this nice setup which is suggesting USDCAD is about to fall in the following weeks and months. A confirmation would be a weekly close below 1.30 level.
Let’s see how this plays out in the following months. And if the price in the index and some of these major pairs is not completely rejected, it will hard to go with any other than the bearish case.