16-year Dollar cycle. Will it repeat this time?
Investors hearing about the US dollar market cycles are initially skeptical and doubtful. However, it became clear in 2017 that three 16-year cycles had completed over the past 48 years. The euro had started to rise from $1.05 and 16 years had passed since the prior cycle started in 2001. It should not be a surprise that cycles exist and repeat in the dollar. Investors accept the business cycle and they recognize that cycles exist and repeat in interest rates, equities, and many economic variables such as unemployment. These cycles are driven by economic fundamentals and investor behavior. Those that drive the dollar include purchasing power parity, mean reversion, and global commodity production.
A brief description of the chart:
As we can see we are in an scending channel formed by 3-cycle-waves each one lasting around 190 months, which gives almost 16 years.
This is a trend showing us that the strength of the dollar is systematically decreasing.
As to my count, we should have started the next long impulse on the EURUSD at the beginning of 2017... end we did bounce nicely from the supporting trendline! Then we had an expected retest on the trendline which is a totallt normal price action. However, now due to the Corona Crisis we broke through it and are heading south. This is obviously because the world capital paniced and flew into the US Treasuries - strengthening the dollar.
Given the current situation - market uncertainties - we can expect the dollar to strengthen even further, as suggested by the turning Stochastic indicator! EURUSD could hit the 1 parity level and break through it during another wave of market panic, for example during summer when the macro data for the 2nd quarter will be released (and trust me, those numbers will be nasty!), or during the upcoming fall season when the 2nd Corona wave will hit...
Anyway, sooner or later the dollar will give back it's gains.
If our cycle shall repeat EURUSD should hit 1,85 around mid/late 2025 - notice that the waves price action is a little bit skewed to the right side, which reflects the fact that the bullish impulse lasts longer than the retracement. In this Corona environment this phenomena could have a greater magnitude.
The end of this upcoming cycle will be reached on Dec'2035 at it's low around 1,35.
Quick comparison between USA and the EUROZONE:
Total GDP : 21 trillion $ vs. EU 19 trillion $ / Eurozone 14 trillion $ (keep in mind that those are nominal numbers and the US during last 2 decades had higher inflation rates than the Eurozone)
Central bank BS : 6.6 trillion $ vs. 5.28 trillion $
Gov Debt to GDP : 107% vs. 84% (EU 79%)
Trade Balance : - 40 B a month (average) vs. + 20 B a month (average)
US trade deficit with EU: around 160 B a year.
THE END OF DOLLAR SUPREMACY?
Did you know that since the FED was established in 1913 the greenback lost 96% of it's purchasing value?
----------------------------
They are already by-passing it! :
----------------------------
The weakening of the dollar will be a great opportunity to invest in Emerging Markets economies! Apart from the fact that they are heavily undervalued in respect to developed countries, EM's were always giving a nice return during periods of greenback retracements. Moreover dollar denominated commodities will increase in price and boost their profits (lots of EM countries export tons of their natural resources). Global capital will flow in EM's direction!
Another great place to park your investments during this upcoming cycle are obviously precious metals. In particular gold and silver (I would avoid metals used mainly in the production industry cause the turmoil and real economy devastation inflicted by the approaching Great Depression vol2 will have a negative impact on their demand).
Last but not leat, cryptos! Yeah! Cryptos! Finally there will come a day that even the sleeping masses will realize that e.g. Bitcoin, cannot be printed, magically multiplied by a fractional-reserve system and be used in a centralised goverment-planned scam. Moreover they will find out it offers them faster and cheaper transactions, safety and tons of freedom!
----------------------------
Central banks have now no space for manouvers. They hit 0% interest rates. Now they can only create money from thin air and drop it from their helicopters. I think that the FED will lead this madness, trying to exploit the position of the dollar as world reserve currency. This is the perfect script of a classic Triffin's Dilemma scenario - the US will run bigger and bigger trade and budget deficits, will distribute funny money and "free lunches", will issue enormous amounts of debt under which it will suffocate (debt that will be used to bail-out inefficient corporations and fraudulent institutions). Eventually, the markets will loose faith in the greenback. Treasuries will be dumped and excessive reserves helded all around the world will come back to the US causing an substantial inflation.
----------------------------
In past cycles, when investors outside the U.S. had a lower exposure to the dollar, they could absorb large losses when it fell. That’s no longer true. A euro-based investor who holds a third or more of its assets in dollar denominated investments cannot afford to be idle as the dollar falls 20% to 30% over the next few years. They will begin to reduce allocations and increasingly hedge the dollar. That will add additional downward pressure on the dollar as it falls.
Global investors have become excessively exposed to dollar-denominated assets. Allocations to U.S. assets have been driven higher by the artificial superior performance of U.S. equities and bond yields that were higher than those in Europe and Asia. As the 16-year cycle unfolds and the dollar falls, these investors will begin to reduce allocations down to or below their benchmarks. They will also increase their hedging of the dollar. All of this will add to the downward pressure on the greenback.
This behavior is not incorporated in economic forecasting models. As a result, economic forecast made by banks, economists and central-bank planners are unreliable and too short-term in their horizons to assist investors.
To sum up, I think we are entering into the last US dollar cycle during which the greenback is privileged by the status of the world reserve currency. As I mentioned earlier, there is still a lot of space for the dollar to strengthen in the short-run but in the long-run the king will lose it's crown. As traders we should be prepared for that.
Good luck & all the best!
A brief description of the chart:
As we can see we are in an scending channel formed by 3-cycle-waves each one lasting around 190 months, which gives almost 16 years.
This is a trend showing us that the strength of the dollar is systematically decreasing.
As to my count, we should have started the next long impulse on the EURUSD at the beginning of 2017... end we did bounce nicely from the supporting trendline! Then we had an expected retest on the trendline which is a totallt normal price action. However, now due to the Corona Crisis we broke through it and are heading south. This is obviously because the world capital paniced and flew into the US Treasuries - strengthening the dollar.
Given the current situation - market uncertainties - we can expect the dollar to strengthen even further, as suggested by the turning Stochastic indicator! EURUSD could hit the 1 parity level and break through it during another wave of market panic, for example during summer when the macro data for the 2nd quarter will be released (and trust me, those numbers will be nasty!), or during the upcoming fall season when the 2nd Corona wave will hit...
Anyway, sooner or later the dollar will give back it's gains.
If our cycle shall repeat EURUSD should hit 1,85 around mid/late 2025 - notice that the waves price action is a little bit skewed to the right side, which reflects the fact that the bullish impulse lasts longer than the retracement. In this Corona environment this phenomena could have a greater magnitude.
The end of this upcoming cycle will be reached on Dec'2035 at it's low around 1,35.
Quick comparison between USA and the EUROZONE:
Total GDP : 21 trillion $ vs. EU 19 trillion $ / Eurozone 14 trillion $ (keep in mind that those are nominal numbers and the US during last 2 decades had higher inflation rates than the Eurozone)
Central bank BS : 6.6 trillion $ vs. 5.28 trillion $
Gov Debt to GDP : 107% vs. 84% (EU 79%)
Trade Balance : - 40 B a month (average) vs. + 20 B a month (average)
US trade deficit with EU: around 160 B a year.
THE END OF DOLLAR SUPREMACY?
Did you know that since the FED was established in 1913 the greenback lost 96% of it's purchasing value?
----------------------------
They are already by-passing it! :
- CIPS - China Interbank Payment System (signed by over 30 countries)
- crude oil future contracts denominated in yuans and exchangable directly for gold on the Shanghai Exchange
- INSTEX - European project to by-pass the SWIFT and the dollar standard
----------------------------
The weakening of the dollar will be a great opportunity to invest in Emerging Markets economies! Apart from the fact that they are heavily undervalued in respect to developed countries, EM's were always giving a nice return during periods of greenback retracements. Moreover dollar denominated commodities will increase in price and boost their profits (lots of EM countries export tons of their natural resources). Global capital will flow in EM's direction!
Another great place to park your investments during this upcoming cycle are obviously precious metals. In particular gold and silver (I would avoid metals used mainly in the production industry cause the turmoil and real economy devastation inflicted by the approaching Great Depression vol2 will have a negative impact on their demand).
Last but not leat, cryptos! Yeah! Cryptos! Finally there will come a day that even the sleeping masses will realize that e.g. Bitcoin, cannot be printed, magically multiplied by a fractional-reserve system and be used in a centralised goverment-planned scam. Moreover they will find out it offers them faster and cheaper transactions, safety and tons of freedom!
----------------------------
Central banks have now no space for manouvers. They hit 0% interest rates. Now they can only create money from thin air and drop it from their helicopters. I think that the FED will lead this madness, trying to exploit the position of the dollar as world reserve currency. This is the perfect script of a classic Triffin's Dilemma scenario - the US will run bigger and bigger trade and budget deficits, will distribute funny money and "free lunches", will issue enormous amounts of debt under which it will suffocate (debt that will be used to bail-out inefficient corporations and fraudulent institutions). Eventually, the markets will loose faith in the greenback. Treasuries will be dumped and excessive reserves helded all around the world will come back to the US causing an substantial inflation.
----------------------------
In past cycles, when investors outside the U.S. had a lower exposure to the dollar, they could absorb large losses when it fell. That’s no longer true. A euro-based investor who holds a third or more of its assets in dollar denominated investments cannot afford to be idle as the dollar falls 20% to 30% over the next few years. They will begin to reduce allocations and increasingly hedge the dollar. That will add additional downward pressure on the dollar as it falls.
Global investors have become excessively exposed to dollar-denominated assets. Allocations to U.S. assets have been driven higher by the artificial superior performance of U.S. equities and bond yields that were higher than those in Europe and Asia. As the 16-year cycle unfolds and the dollar falls, these investors will begin to reduce allocations down to or below their benchmarks. They will also increase their hedging of the dollar. All of this will add to the downward pressure on the greenback.
This behavior is not incorporated in economic forecasting models. As a result, economic forecast made by banks, economists and central-bank planners are unreliable and too short-term in their horizons to assist investors.
To sum up, I think we are entering into the last US dollar cycle during which the greenback is privileged by the status of the world reserve currency. As I mentioned earlier, there is still a lot of space for the dollar to strengthen in the short-run but in the long-run the king will lose it's crown. As traders we should be prepared for that.
Good luck & all the best!
