DXY Short and Long-term Analysis: Don't Fight The Fed!
tl;dr: "Don't Fight The Fed!"
Summary:
I believe the DXY is currently trending upwards for the short-term (1-3 years); however, will revert back towards a mean trend that has formed over a longer duration of 20+ years.
This mean reversion will be driven by a combination of factors; however, increased volatility from tail events will provide the greatest assistance for an intermediate-term (5-10 year) polynomial regression.
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DXY Price Targets:
Short-Term: ~Summer 2023 @ ~$112
Mid-Term: ~Summer 2032 @ ~$68
Long-Term: ~Summer 2041 @ ~$104
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Disclaimer:
**I had to remove links due to not being a "Pro" member**
The commentary below is largely based on my impressions of the markets, economy, and current events. It is highly likely that I am completely wrong, so please do not rely on this for investment decisions, especially as my investment profile (i.e. risk tolerance, investment goals, time horizon, etc) is likely different from yours. This write-up evolved over the course of my analysis and it's early AM, so I'm forgiving of errors.
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Technical Analysis:
TradingView's DXY public data goes back to 1986 and shows the overall downward trend of the DXY; however, there are sharp, intermediate movements characterized by diminishing peaks and lower troughs.
There are 15-year differences between the peaks of 1986 to 2001 and 2001 to 2017.
There are roughly the same differences between the troughs of 1993 and 2008.
If the overall trend continues, then a new low would be expected roughly 2023 (+/- 1 to 2 years).
Interestingly, the Trend-Based Fibonacci Time Lines starting at the initial August 1992 low, then January 2002 high, and April 2008 low indicates Summer (July-August) 2023 as the 1.618 significance marker.
There was a downward trend from 2002 to 2008 that then formed into a triangle pattern. A upwards breakout took place in 2014 due to the tightening of fiscal policy and rising interest rates.
A peak is formed in 2017 with price consolidation appearing to form another triangle (or pennant) pattern. Volume for the DXY (not shown on the chart) continues to follow a similar pattern, with declining peak volumes supporting the idea that a technical pattern has formed. This trading pattern is typically a continuation pattern that would indicate a potential upwards breakout of approximately 10-12% (based on the high and low) to around the $112 price level.
The referenced chart includes both the Historical Volatility (HV) and Relative Volatility Index (RVI), while the Fed Funds rate is at the bottom. The HV appears to lag the DXY; however, the RVI appears to slightly lead and/or match the DXY. Based on that observation, it would seem that the RVI for the past two years following the 2020 crash has been consolidating between the 50 and 60 levels. The Fed Funds rate is interesting in that there are both periods of positive and negative correlation between it and the DXY. During periods when rates are expected to rise, there is often a positive correlation. Once rates begin to rise, then the correlation has a tendency to turn negative resulting in notable declines in the DXY's performance. Afterwards, the correlation starts to increase and become positive as the RVI and DXY's performance increases. Considering the low level of the Fed Funds rate and the currently increasing correlation (currently -0.03), it's possible for the correlation to return to a positive level of approx 0.4, based on the visible trends.
Traditionally, the Dollar strengthens when the Fed is raising rates, in addition to tightening fiscal and monetary policies. There is a decent chance that a 10% or more upwards breakout may result, especially with the Fed's recent announcement of a rate increase as early as March 2022. This strength in the US Dollar may be relatively short-lived, as the correlation patterns between the DXY and Fed Funds rate shows that there may be more positive ground gained due to early investor sentiment than the actual rate increase itself.
As to the potential peak Fed Rate, a simple Fib Retracement starting with the 2000 high and current low, the first Fib resistance level at 0.236 is a rate of approximately 1.6%.
Interestingly, at least one other source references an estimate of 1.75% by 2023.
I included some additional economic indicators, such as the US GDP, M2 Money Supply, US Oil Exports, and Weapons Sales.
Below are the Gold Reserves for Russia, China, and India. Then, the gold reserves for Russia, China, and India. Lastly, futures prices for Oil, Sugar, and Gold followed by the S&P Index.
It is interesting to see the stepped increases in the gold reserves, in addition, the growth of US Oil Exports over the past 20 years has been incredible. This corresponds with the growth of US Crude Oil Production on a per barrel basis.
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Discussion:
The strength of the US Dollar serves as the foundation for the global economy.
It reflects the outlook of the US economy, including economic trade (supply and demand), which is augmented by market sentiment.
As such, the unprecedented increase in US Debt, money supply, and central bank balance sheets has been interwoven into the market's growth following the March 2020 market crash. Inflationary red flags, which were initially downplayed as "transitory", are now being used by The Fed to warrant interest rate increases. In addition, supply and demand issues have continued to plague US consumers, especially in major sectors, such as housing. The housing market has continued to see diminishing inventories of housing, while the rate of change in (currently high) prices has been diminishing. The US Auto market has also been struggling. Microchip supply issues have plagued the new auto market, which has left dealerships struggling to find used vehicles to maintain their inventories. Shipping container shortages and delays are still at elevated levels in export-based countries, such as China, while US consumer demand has been slowing after the end of government payments and housing moratoriums. Global supply chain shortages and delays, which were initiated by global COVID-19 restrictions, do not appear to have any near-term end in sight. With the upcoming Spring still 2-3 months away and seasonal layoffs before the end of fiscal budgets, I don't expect to see an increasing level of consumer demand.
Market sentiment for the US Dollar is also impacted by sentiment regarding the strength of the US Government. Unfortunately, this can be reflected by US Political sentiment. Given the weakness of the Democratic Party, President Biden, and increasing level of political correctness fatigue, there is a reasonable probability that the US Legislature will swing back to Republican control, thus reducing President Biden's efficacy and increasing the possibility of punitive measures (i.e. impeachment). The recently escalated narrative regarding Ukraine and Russia has seemingly overshadowed other important issues, including the increasing divide between moderate, liberal, and Bolshevik Democrats. The Chinese government has also continued to utilize declining US geopolitical strength in an attempt to expand its control over its global interests, including Hong Kong, Taiwan, and its Silk Road partners. With Presidents Xi and Putin continuing to increase in age, it is unlikely their motivations for leaving a lasting legacy will be reduced; however, they both face headwinds from ideological divisions within their respective countries. Overall, market sentiment has the strong possibility of turning bearish if geopolitical factors continue to deteriorate and depress US GDP growth.
It is my belief that there is currently an elevated tail risk within the global economy that will continue to increase as the ripple effects from the COVID-19 governmental response continue to be felt. The actions of governmental entities have consistently been at the center of tail events and subsequent market declines. Even the recent uncertainty regarding rate increases by the Fed, in conjunction with downgraded earnings outlooks in companies, such as Netflix, have left the global markets shifting in an attempt to find reasonable real returns. Cryptocurrency markets have continued to deteriorate as their volatility and continued dilution by other blockchain-based competitors, such as NFT's, limits their usage to pure speculation.
Unfortunately, the popularity of cryptocurrencies and the blockchain technology with retail traders and companies looking for quick and unsustainable returns has led to increased attention from central banks. Central Bank Digital Currencies are being considered as an auxiliary to traditional currencies and some countries, such as China, have already started implementation of their own digital currencies. Between meddling with interest rates and currencies, it has yet to be seen whether or not central banks, primarily the Fed, create another economic recession.
Historically, the US economy and markets have continued to experience long-term growth, despite short-term declines. While some economic indicators show signs of slowing, timing the movement of markets and/or tail events is largely speculative. Analysis of historical data does not guarantee accurate predictions of the future, especially when considering the relatively limited time scale of the referenced data (1986 to 2022).
There is certainly a possibility that longer-term data may reflect the DXY's performance as similar to an inverted parabola. If this is true, then there is the potential for a positive, long-term trend to appear. Then again, this might change if digital central bank currencies become widely implemented and tail events continue to challenge fundamentals.
Overall, the DXY provides an interesting gauge for the efficacy of interest rates, especially when considering the pricing of instruments within other markets. As an investor, the expectation of increasing real rates of return can be tampered by rapidly rising inflation rates and/or taxes. I certainly hope that we do not see stagnation take hold of the US, especially via issues surrounding a low-trust culture; where economic growth is slowed by a poorly functioning population. Unfortunately, there are increasing concerns that the US economy is facing headwinds despite the many positive growth opportunities available to investors.
----
Summary:
I believe the DXY is currently trending upwards for the short-term (1-3 years); however, will revert back towards a mean trend that has formed over a longer duration of 20+ years.
This mean reversion will be driven by a combination of factors; however, increased volatility from tail events will provide the greatest assistance for an intermediate-term (5-10 year) polynomial regression.
----
DXY Price Targets:
Short-Term: ~Summer 2023 @ ~$112
Mid-Term: ~Summer 2032 @ ~$68
Long-Term: ~Summer 2041 @ ~$104
----
Disclaimer:
**I had to remove links due to not being a "Pro" member**
The commentary below is largely based on my impressions of the markets, economy, and current events. It is highly likely that I am completely wrong, so please do not rely on this for investment decisions, especially as my investment profile (i.e. risk tolerance, investment goals, time horizon, etc) is likely different from yours. This write-up evolved over the course of my analysis and it's early AM, so I'm forgiving of errors.
----
Technical Analysis:
TradingView's DXY public data goes back to 1986 and shows the overall downward trend of the DXY; however, there are sharp, intermediate movements characterized by diminishing peaks and lower troughs.
There are 15-year differences between the peaks of 1986 to 2001 and 2001 to 2017.
There are roughly the same differences between the troughs of 1993 and 2008.
If the overall trend continues, then a new low would be expected roughly 2023 (+/- 1 to 2 years).
Interestingly, the Trend-Based Fibonacci Time Lines starting at the initial August 1992 low, then January 2002 high, and April 2008 low indicates Summer (July-August) 2023 as the 1.618 significance marker.
There was a downward trend from 2002 to 2008 that then formed into a triangle pattern. A upwards breakout took place in 2014 due to the tightening of fiscal policy and rising interest rates.
A peak is formed in 2017 with price consolidation appearing to form another triangle (or pennant) pattern. Volume for the DXY (not shown on the chart) continues to follow a similar pattern, with declining peak volumes supporting the idea that a technical pattern has formed. This trading pattern is typically a continuation pattern that would indicate a potential upwards breakout of approximately 10-12% (based on the high and low) to around the $112 price level.
The referenced chart includes both the Historical Volatility (HV) and Relative Volatility Index (RVI), while the Fed Funds rate is at the bottom. The HV appears to lag the DXY; however, the RVI appears to slightly lead and/or match the DXY. Based on that observation, it would seem that the RVI for the past two years following the 2020 crash has been consolidating between the 50 and 60 levels. The Fed Funds rate is interesting in that there are both periods of positive and negative correlation between it and the DXY. During periods when rates are expected to rise, there is often a positive correlation. Once rates begin to rise, then the correlation has a tendency to turn negative resulting in notable declines in the DXY's performance. Afterwards, the correlation starts to increase and become positive as the RVI and DXY's performance increases. Considering the low level of the Fed Funds rate and the currently increasing correlation (currently -0.03), it's possible for the correlation to return to a positive level of approx 0.4, based on the visible trends.
Traditionally, the Dollar strengthens when the Fed is raising rates, in addition to tightening fiscal and monetary policies. There is a decent chance that a 10% or more upwards breakout may result, especially with the Fed's recent announcement of a rate increase as early as March 2022. This strength in the US Dollar may be relatively short-lived, as the correlation patterns between the DXY and Fed Funds rate shows that there may be more positive ground gained due to early investor sentiment than the actual rate increase itself.
As to the potential peak Fed Rate, a simple Fib Retracement starting with the 2000 high and current low, the first Fib resistance level at 0.236 is a rate of approximately 1.6%.
Interestingly, at least one other source references an estimate of 1.75% by 2023.
I included some additional economic indicators, such as the US GDP, M2 Money Supply, US Oil Exports, and Weapons Sales.
Below are the Gold Reserves for Russia, China, and India. Then, the gold reserves for Russia, China, and India. Lastly, futures prices for Oil, Sugar, and Gold followed by the S&P Index.
It is interesting to see the stepped increases in the gold reserves, in addition, the growth of US Oil Exports over the past 20 years has been incredible. This corresponds with the growth of US Crude Oil Production on a per barrel basis.
----
Discussion:
The strength of the US Dollar serves as the foundation for the global economy.
It reflects the outlook of the US economy, including economic trade (supply and demand), which is augmented by market sentiment.
As such, the unprecedented increase in US Debt, money supply, and central bank balance sheets has been interwoven into the market's growth following the March 2020 market crash. Inflationary red flags, which were initially downplayed as "transitory", are now being used by The Fed to warrant interest rate increases. In addition, supply and demand issues have continued to plague US consumers, especially in major sectors, such as housing. The housing market has continued to see diminishing inventories of housing, while the rate of change in (currently high) prices has been diminishing. The US Auto market has also been struggling. Microchip supply issues have plagued the new auto market, which has left dealerships struggling to find used vehicles to maintain their inventories. Shipping container shortages and delays are still at elevated levels in export-based countries, such as China, while US consumer demand has been slowing after the end of government payments and housing moratoriums. Global supply chain shortages and delays, which were initiated by global COVID-19 restrictions, do not appear to have any near-term end in sight. With the upcoming Spring still 2-3 months away and seasonal layoffs before the end of fiscal budgets, I don't expect to see an increasing level of consumer demand.
Market sentiment for the US Dollar is also impacted by sentiment regarding the strength of the US Government. Unfortunately, this can be reflected by US Political sentiment. Given the weakness of the Democratic Party, President Biden, and increasing level of political correctness fatigue, there is a reasonable probability that the US Legislature will swing back to Republican control, thus reducing President Biden's efficacy and increasing the possibility of punitive measures (i.e. impeachment). The recently escalated narrative regarding Ukraine and Russia has seemingly overshadowed other important issues, including the increasing divide between moderate, liberal, and Bolshevik Democrats. The Chinese government has also continued to utilize declining US geopolitical strength in an attempt to expand its control over its global interests, including Hong Kong, Taiwan, and its Silk Road partners. With Presidents Xi and Putin continuing to increase in age, it is unlikely their motivations for leaving a lasting legacy will be reduced; however, they both face headwinds from ideological divisions within their respective countries. Overall, market sentiment has the strong possibility of turning bearish if geopolitical factors continue to deteriorate and depress US GDP growth.
It is my belief that there is currently an elevated tail risk within the global economy that will continue to increase as the ripple effects from the COVID-19 governmental response continue to be felt. The actions of governmental entities have consistently been at the center of tail events and subsequent market declines. Even the recent uncertainty regarding rate increases by the Fed, in conjunction with downgraded earnings outlooks in companies, such as Netflix, have left the global markets shifting in an attempt to find reasonable real returns. Cryptocurrency markets have continued to deteriorate as their volatility and continued dilution by other blockchain-based competitors, such as NFT's, limits their usage to pure speculation.
Unfortunately, the popularity of cryptocurrencies and the blockchain technology with retail traders and companies looking for quick and unsustainable returns has led to increased attention from central banks. Central Bank Digital Currencies are being considered as an auxiliary to traditional currencies and some countries, such as China, have already started implementation of their own digital currencies. Between meddling with interest rates and currencies, it has yet to be seen whether or not central banks, primarily the Fed, create another economic recession.
Historically, the US economy and markets have continued to experience long-term growth, despite short-term declines. While some economic indicators show signs of slowing, timing the movement of markets and/or tail events is largely speculative. Analysis of historical data does not guarantee accurate predictions of the future, especially when considering the relatively limited time scale of the referenced data (1986 to 2022).
There is certainly a possibility that longer-term data may reflect the DXY's performance as similar to an inverted parabola. If this is true, then there is the potential for a positive, long-term trend to appear. Then again, this might change if digital central bank currencies become widely implemented and tail events continue to challenge fundamentals.
Overall, the DXY provides an interesting gauge for the efficacy of interest rates, especially when considering the pricing of instruments within other markets. As an investor, the expectation of increasing real rates of return can be tampered by rapidly rising inflation rates and/or taxes. I certainly hope that we do not see stagnation take hold of the US, especially via issues surrounding a low-trust culture; where economic growth is slowed by a poorly functioning population. Unfortunately, there are increasing concerns that the US economy is facing headwinds despite the many positive growth opportunities available to investors.
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