USDX Index story is very interesting . The underlying factors that affect the dollar have a huge divergence so what can we make of this
Forex FACTORS: ( Note: there are other factors that do affect the USDX index and other correlations but are not critical to short-term trading)
- XAUUSD ( GOLD) - XBRUSD (BRENT OIL) & XTIUSD (WTI OIL) - Interest Rates for US, EU, UK, Japan - US Treasury Yields for 2, 5, 10, 30 years - EU & UK Bond yields - EURUSD (Euro) - GBPUSD (Pound) - USDJPY (Yen) - Stock Markets ( DOW, SP500, NASDAQ, NIKKEI, FTSE, DAX, EU ) - Massive Stimulus from Central Banks across the world ( Money Printing Press is widely open , the tap is flowing )
Home Work ? Take a look at the prices of each of above assets during the tops , bottoms and at resistance/support areas marked on the chart and see what exactly was going on. i will only talk about some of March - August events. As of today 5th August , 2020
- Gold == US$ 2040 ( All time high) - XBRUSD == US$ 44 - Interest rates in US & EU , UK, Japan at 0 or close to Zero - US Treasury Yields are approaching Zero - EU & UK sovereign Bond yields are Negative or near zero - EURUSD , GBPUSD are shooting through the roof , USDJPY is collapsing as usual - Stock Markets are approaching all time highs again after a sharp drop in March when COVID-19 pandemic started - Massive Stimulus from Central Banks & Governments across the world is helping fuel the rapid stock market rallies around the world.
Since 2015 , USD index has been above 88.50 handle. Here are levels to watch
TOP Box range == 102 to 91.50 ( Medium to Strong Dollar (Anything above 100)) Inflection Point (Major Resistance/Support) == 88.50 BOTTOM Box range == 88 to 75 ( Weaker Dollar Area )
How are EU , UK and Japan fairing in terms of their Economies ? Weak USD means technically EURUSD, GBPUSD, GOLD will always shoot up and USDJPY will collapse
US government does not want USD to be too weak and unstable since its the World Reserve Currency used in all SWIFT global/cross-border commercial transactions around the world. Anything that causes the world to loose confidence in USD is bad for US and business around the world. So what does US do about the USD ?
-- Open the USD Printing press for liquidity on the front end but start mopping the excess liquidity on the backend using various mechanisms to bring stability in USD instead of a free fall.
NOTE: China is also vying for a Super Power status ( Both Economic & Military ). Its a catch-22 for USD . Economically , China has so much influence on the Global economy and indirectly how the USD is viewed and used across the world.
Excuse me , Sir ? Do we now sell EURUSD & GBPUSD ? Frankly, YES for a long-term (1 to 3 months ) , YES for Short-term ( 1 to 8 Weeks ) and NO for day trading . we are at critical levels in which those assets will be very volatile on a daily basis until we have a clear trend.
Comment
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We have broken or spiked above 1.1910 on EURUSD in the last 5 weeks . Chance are that the rally might extend to 1.2530 before any any pullback . Note: The rally is fuelled by USD weakness not EURO strength
hey could you elaborate on 'backend mechanisms' that the US will use to stabilise USD? And would this be the reason for USD gaining in the next 3 months (as per your forecast)? Cause i couldnt see a gain in the next 3 months, especially when congress is looking at the next round of stimulus between early August and September.
WoodieGuthrie44
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@zenzozuma, By mopping up, maybe he means the Fed buying up all the bad paper (insolvent enterprises). If so, there are problems reaching that goal. If finally there was success, it would mean the country owns the whole thing, ie, a nationalized economy. I can't see that being tolerated in a country that has such a strong aversion to socialism. Beside that, there are problems on the financial markets level. The Fed has given the job of mopping up to Black Rock of mopping up, as far as I can make out. We don't know how much of that bad debt is recycled back into the system through the back door, in the creation of new ETF's and other instruments as they come along. Have you seen the yield of junk bonds today ...zero. Doesn't that indicate a dead economy? Isn't this the end result of finacialization of the economy? Oh, yes, I think there are big problems mopping up.
I agree, Remember who controls the main gears of capitalism around the world --- USA. It is uses all kind of instruments in the financial world, if they don't exist they will create them.
The way it works: Financial/Market Crisis ==> FED uses Interest rates, other instruments and Printing Press to manage liquidity, US Treasury keeps selling Debt to fund the Govt but also controlling the US Dollar ==> Backend Mopping starts ==> the cycle just keeps repeating.
Remember Other central banks look to the FED before they take any action and most of their CB reserves are in USD. You need USD to do any Cross-border transaction anywhere in the world if you are a global business.
USA ==> Consumer Based Economy ( 70% of its economy ) ==> You need Cheaper prices for products and services but a strong dollar value to get you further.
Strong Dollar ==> Cheaper Manufacturing in China / off-shore ==> Bigger profits for global companies but also higher import taxes (which they never pay fair amount anyway) when they bring the products back to US.
Strong Dollar ==> off-shore manufacturing and sell them in the off-shore markets to gain global markets and import back to US for bigger profit margins.
Strong Dollar ==> is trouble for Debt ridden countries with USD denominated Debt because they have to pay high interest on their loans but it is also great for Central Banks because they sell the Excess USD reserve to fund their Govts.
Weaker Dollar ==> Great for USA , because the USA Govt Debt becomes cheaper + Plus Export based economies can't make much profit margin selling in USA due to weak dollar
WoodieGuthrie44
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@developeralgo222, Thanks for laying it all out, and also for replying to my very first comment on tradingview :)
TaggM
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Here's what happened: The US Congress deflated the value of the US dollar by creating extra trillions of US dollars without true domestic production
Klataro
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@Alf_Patton, yeah, big boomerang incoming. It will chop off a bunch of heads.
ABDOLLAR_FX
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NIce analysis, fundamentally, but the usd weakness index will be ending soon, based on my Elliot wave approach to the technicals
I don't think USD weakness will continue much further, i think if it extends we will hit 88.50 before we bounce. The problem is that USD can't be seen as unstable and free falling to the world otherwise if it looses confidence and then Central banks will start using other currencies in big volumes than USD