Hello David and Eoin,

It struck me how different the dollar index looks over different time horizons. For instance, on the daily chart, we saw a key day reversal yesterday in an area of previous support and suggests rally potential in the shorter term. On the other hand, on a 5 year weekly chart, it looks like it has formed a top near the 100 level. If the latter is correct, that supports the medium term bullish case for commodities and emerging markets. It would need to break support around 88/89 to confirm that it has indeed topped. From a fundamental perspective, the strength in the euro and the yen this year argues that the trend in the currency markets has switched for now to current account balances from interest rate differentials which prevailed from 2013 to 2015. Both the euro zone and Japan have seen their current account surpluses swell over the past few years as a result of currency depreciation and a fall in commodity prices.

Looking at a 20 year monthly chart suggests yet a different path the dollar might take. This suggests that the dollar had paused near 100 and is now ready to try the upside again. This psychological level will be a stiff barrier to overcome, but if it were to be contained in a range of say, 88 - 100, commodities should still do well as they have other positive factors in their favour.  At the end of the day, no country wants a particularly strong currency, so the policy makers will strive to maintain a ranging environment.

I would welcome your comments.

Kind regards

David Fuller's view

Many thanks for an interesting email.

Re the Dollar Index outlook, I think we get the most perspective from long-term charts, and I mainly use daily charts for occasional monitoring of short-term trading.  So, moving in reverse order from your sequence above, I will start with a 50-year semi-log chart.  It shows how incredibly cheap the Dollar Index was in 2008, following a climactic slump, mainly in two stages, which began in 2002.  I suspect no country or company which was borrowing in more liquid USD below 80 had looked at this chart.  Subsequently, the big upward dynamic to almost 90 confirmed that an important floor had been reached and that potentially lengthy base formation development was likely, as we had seen previously.  Yes, I am now commenting with hindsight but the post 2008 analysis of the Dollar Index was less challenging than usual, as a search of the archive will show, because it was occurring following an extreme move and we often commented on it.  Determining the timing of the completion of this big Type-3 base, with its churning time and size characteristics as detailed at The Chart Seminar, was more difficult because we had a lower low in 2011.  However, the subsequent steadying above 79 showed a much higher low, confirmed by the persistent move above 85.

So where are we today?  The 20-year monthly chart with MA shows the base more clearly, including the diminishing number of big red candles and increasing number of big blue candles, confirming that demand was regaining the upper hand.  We also saw that the Dollar Index could not break decisively above the psychological 100 level, I suspect because of US Treasury surreptitious intervention on behalf of the Fed, at a time when many big institutional traders were trying to force an upside breakout. 

Increasing magnification with the weekly 5-year chart, we now have the intriguing possibility of a downside failure at a time when institutional traders are mainly short and the market is technically short-term oversold.  I have illustrated this on the daily chart and while the two small rally highs in April would need to be cleared to provide convincing evidence of downside failure, Tuesday’s rebound from just below 92 was a clue.  Moreover, there was some additional upside follow through on Wednesday.

Fuller Treacy Money’s hunch is that the trading range with an upside barrier just above 100 is a very lengthy consolidation of the Dollar Index’s initial advance from the base formation, prior to further gains over the longer term, as I have mentioned previously.  We will see, of course, and I agree with many of the above email’s conclusions regarding commodities which are this year’s most interesting sector.