There were signs, now it is happening. I was looking forward to Dollar weakening late April and falling out of support at 92 because another Federal Reserve rate hike in 2016 looked impossible but now the Dollar Index is strengthening. Is this because the USD is truly stronger or is it because other currencies are weaker I cannot tell.
Reasons for DXY strengthening
If one sees demise of Euro as inevitable after Brexit, then all that wealth that is currently kept in EUR has to flee somewhere. Line up all the possible havens GBP, CHF, JPY and RMB one can see why not to consider the USD.
Dollar Index monthly chart May 2013 to present
There is another possible reason. What if an interest rate hike is coming? I wrote this on June 13
What if the data driving the Fed was the Dow/S&P?
Consider that Yellen was mouthing ‘rate hikes’ since 2014. Consider that for all that better data from 2014 – early 2015 she did not hike. Consider that she hiked into December 2015 when data was turning for the worse in Q4. Now this slide is a pretty telling picture.
Despite the hike in December 2015 and promises of 4 more hikes in 2016, DXY did not bother to touch 100. Just think of this – if more hikes were really coming, why didn’t the USD strengthen anymore beyond 100? Unless the market did not believe there was going to be anymore.
What this slide says is that the Fed is basically talking the USD up and down and would be happy to keep DXY between 92 and 100. The strategy goes like this: DXY 100 (strong), go dovish, DXY 92 (weak), go hawkish.
Looks very logical, doesn’t suggest any rate hike.
DXY movement since 2014
What-if just what-if the Fed isn’t driven by economic data like the NFP and is not driven by the DXY? What if the Fed was driven by the stock market?
We can then see that the Fed (focus on D, E, F) went hawkish when the Dow was doing well, and then dovish when the Dow corrected. In my opinion, still makes a lot of sense. This is where slide #3 comes in.
Lower panel shows the Dow Jones Industrial Average
Think about it – with the Dow Jones Industrial Average now at all-time-high, this would be the best time to hike for a ‘stockmarket-dependant’ Fed.
I feel encouraged by this article ‘Former Fed Governor: Fed Is Not Data Dependent; It Is Propping Up Asset Markets (Video)‘ on Schiffgold.com that this is the right track.
“I must say I find their decision making in the last six or seven months puzzling…It is not obvious what their strategy is. I know…they say they’re data-dependent. I don’t know exactly what that means.”
“They look to me asset price dependent more than they look data dependent. When the stock market falls like it did in the beginning of this year they say, ‘Oh, we better not do anything.’ Stock markets are now at career highs. I suspect when they meet over the course of the next 10 days they will suggest, ‘Oh now they look like they can be somewhat more responsible.’ I don’t like changing policy meeting to meeting based on data, or even with what the S&P 500 is doing. I like making it based on what’s happening on the real side of the economy, and that has not been very convenient over the last six to nine months.”
EURUSD, WTI and value of USD
Whatever the reason is for USD strengthening, DXY is now trading higher than last quarter. There is a strong possibility we will see one or both outcomes happening.
- DXY strengthens to 100, EURUSD concurrently fall to 1.046-1.052. This EURUSD zone coincides with DXY 100 on 2 occasions 13 March 2015 and 02 December 2015.
DXY EURUSD inverse correlation, weekly chart 2015 – present | Source: Tradingview.com
- DXY goes up, WTI, Brent comes down. Sorry guys. Those oil inventory numbers are just day to day noise for WTI. Over long, the true driver of oil price is the value of the USD.
WTI, DXY correlation, monthly chart 2002 – present | Source: Tradingview.com
I see both EURUSD and WTI already started towards those outcomes here (log-in required) and here.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
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