What's Up/Down With The Dollar?
- The Dollar Index-too heavily weighted in favor of the Euro
- A closer look at the long-term cross Dollar relationships
- What are the Dollar sympathy indicators saying?
- Short-term technicals
The Dollar Index - Too heavily weighted in favor of the Euro
A few months ago I declared the Dollar Index to be dead in the sense that it had begun a bear market. It went down for a while but has since come back a bit, so now seems as good a time as any to examine the bearish case to see if it still holds water. Chart 1 sets the scene with a monthly chart featuring the 12-month MA and KST for the Index. Please note that this is a monthly chart based on month-end closes. That means that the latest July 20 intra-month plot is an “estimate”. In a strict technical sense, the Dollar is in a primary bear market since it is (marginally) below its MA, the KST is declining and still relatively overbought. In most situations, that’s enough to validate the bearish credentials.
We need to be a bit careful on this point because the two previous major Dollar bull markets were interrupted by KST sell signals, which proved in retrospect to be transitory. The first occurred in the 1982-3 period, where a couple of whipsaw KST signals were triggered. The second, was in 1999, which signaled an intermediate decline in an overall 1997-2000 trading range. In both cases, the negative KST was overruled by a positive 12-month MA crossover. Fast forward to the most recent period, where we see the Index bounce from its extended secular down trendline, together with the possibility that it will cross above its 12-month MA at the end of July. If that does prove to be a reality, then I would conclude that the trend is neutral bullish from outright bearish.
Chart 1
The “Dollar”, though, is not an index as such but consists of a number of cross currency relationships. In most situations these relationships move more or less in the same direction, so a “bullish” Dollar means that the currency is gaining on pretty well everything and a bearish one the opposite. One problem arises because the Dollar Index has a weighting of about 57% in one currency, the Euro. If it is rallying that usually means that the Dollar Index is falling and vice versa. In this respect, Chart 2 compares the recent performance of the Euro against the inverted Dollar. It’s pretty well a mirror image! That suggests that we need to dig deeper to figure out what the currency is really doing.
Chart 2
A closer look at the long-term cross-Dollar relationships
To do this, Chart 3 compares the Dollar’s performance against some of the majors. Each currency has, in its own way, completed and broken down from a multi-year top. The Aussie and Canadian Dollars have already reached their indicated downside objectives, but the Euro and Yen have not. Indeed, the Yen now finds itself at resistance in the form of its breakdown point. If this is still a Yen bear market this could well be the end of a bear market rally. Complicating this conclusion is the fact that all series remain above their 12-month MA’s, which is obviously a bullish factor. Until they drop back below them again, we cannot be sure that these very long-term bear markets are intact. One factor that argues in favor of these tops still being in force comes from the observation that the series of declining primary trend peaks and troughs is still intact. These have been flagged for the Euro by the red and green waves.
Chart 3
Chart 4 embraces two other important cross Dollar relationships to the British Pound and Swiss Franc. Both have recently broken major support trendlines. If those violations are to be believed, then the two currencies have further to run on the downside. Indeed, if we take back the history on the Pound (Chart 5), we see a much larger distribution pattern. It has an indicated downside objective close to the '1985 low' at par.
Chart 4
Chart 5
On a very long-term basis, the indications are that all of the major currencies, with the possible exception of the Aussie and Canadian Dollars, will eventually work their way lower. I say “possible” exceptions of the Canadian and Australian currencies, because they may be in the process of completing a base from which a basic reversal could be launched.
What are the Dollar sympathy indicators saying?
When the Dollar fluctuates it influences many markets and Intermarket relationships. Three of these are featured in Charts 6 and 7. I call them “Dollar Sympathy” indicators because they usually move up and down with the Dollar Index. It is when they diverge that a signal of a possible reversal in the Dollar itself is given.
They are:
- US Stocks versus the rest of the world (SPY/EFA)
- US Bonds versus the rest of the world (TLT/BWX)
- inverted commodity prices (DBC)
The stock ratio peaked in early 2015 and warned that some form of correction in the Index was likely. That correction got underway in March of that year. The stock ratio subsequently experienced a small decline but was recently at a new bull market high, a definite positive for the Index. Also, the bond ratio registered a higher low in the spring of this year but did not confirm the low made by the Index at that time (see the dashed green arrows). Inverted commodities did not violate the red up trendline but still lag, as they are some way from their peak. However, the Index itself has managed to claw its way back above its red breakdown trendline. With the exception of the inverted DBC, the bulk of the indicators in the chart are acting positively for the Dollar.
Chart 6
Indeed, Chart 7, which shows these four indicators overlaid indicates that three of them are rallying in lock step.
Chart 7
Short-term technicals
Chart 8 compares the Dollar ETF, the UUP, to its daily short-term KST and a Currency Diffusion indicator. This latter series monitors a list of cross Dollar relationships that are in a positive trend. It’s an attempt to develop a broad measure of Dollar momentum. At the moment this series is in a negative mode, but the KST in the bottom window is slightly overstretched. However, it is still bullish. Note that the Index itself has just completed an inverse head and shoulders pattern and is right at an intermediate down trendline i.e. major resistance. That, combined with the bearish leaning momentum, argues for some digestion of recent gains. If that does not happen, and the Index surges above the line, that would validate the reverse head and shoulders breakout thereby implying a month-end positive 12-month MA crossover and an implied broad Dollar advance.
Chart 8
That’s a lot to swallow, so let me conclude.
- The major currencies are in a very long-term or secular bear market against the Dollar.
- What I thought would turn out to be a primary bear market may well evolve into a 2-year trading range, which is presumably followed by an upside breakout for the Dollar Index.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.
