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Dollar Index, A Case of Vertigo?

Posted on: 05 November 2018 , by: Darren Sinden , category: Market Review

Trend: Having Rejected A Move Above 97, Are We Now Heading Lower Again?

In the space of 7 days, we'll have October Nonfarm payrolls, the US Midterm elections and the November meeting of the Federal Reserve, plus the latest set of US PMI data. With so many variables and potential influences, you might think it would be wise to stay away from the US currency. However, when you trade FX that is the one thing you can't do. Sure, you can trade crosses or euro pairs, but all roads ultimately lead to the greenback or king dollar as it's sometimes called.

No Head For Heights

For the second time this year, the dollar index, the trade-weighted measure of the US currency has failed to hold onto a move above 97. The last time the dollar was near here was during August when concerns around the Emerging Markets were at their height. Those fears were exemplified by the breakdown in US Turkish relations and the introduction of sanctions and tariffs on the later on by the former. The high of dollar index in that period on the daily chart was 96.984. The rally concluded with the appearance of a shooting star, the high point came on the 15th of the month, from where the dollar sold off to as low as 93.814. That transformation happened in just over five weeks.

US Dollar

Last week, dollar index went one better, breaking above 97 and printing a high of 97.20. However, once again the global reserve currency got another case of vertigo and had to come down the mountain again. To be honest, it made a rather speedy descent, breaking back below the big figure of 97 and selling off steadily from there.t the time of writing the trade-weighted dollar sits at 96.32. As you can see in the two-hourly or 120-minute chart above, that rapid turnaround has taken us back below an uptrend line that had extended higher since mid-October and it now looks likely or at least capable of testing further to the downside. 96.20, 95.80 and 95.40 are plausible downside levels for the US currency should this current spell of negative momentum persist. To avoid this fate, we’d need to see dollar index get back above 96.72 and then 96.82 - these were 120-minute highs on the 26th and 30th of October respectively. A break of 96.20 could be the catalyst from a technical standpoint for an even more significant sell-off, but given the macro and political background we outlined above we need to consider what role the fundamentals will play.

No Crystal Ball

No one can precisely predict the outcome of the US elections, or indeed what the payrolls and PMI data may be, nor can I predict what the will happen at the FOMC. Though it's almost certain that they won’t raise rates, as convention dictates that they don’t vary interest rates in an election month. However, we can speculate on what these events may bring to the party. The Midterm elections will probably have the most significant bearing on the dollar: a Democrat victory in the Congress could potentially limit President Trump’s ability to increase government spending and could, therefore, be bullish for the dollar. However, should the Republicans hold onto control, then the growing US budget deficit and national debt will become even more of a concern to the market. US 10-year Treasury Bond yields have risen through the autumn and in doing so, implied higher borrowing costs and interest rates ahead in the USA. That would usually be seen as being supportive of the currency but not in this instance as question marks remain about just how the Federal government will service, refinance and pay down its growing debt pile. Against that backdrop, Republican gains could potentially weaken the dollar. As far as the macro data is concerned, numbers that show that the US economy is continuing to expand rapidly could also be a negative catalyst because they would suggest that the Fed will need to be more aggressive in normalising interest rates and monetary policy, in the USA. Conversely weaker data could be seen as buying the Fed some breathing space in 2019. A +0.25% rise in December is being effectively priced in by the markets already.

Pick Your Moment And Stay Disciplined 

It promises to be an exciting and volatile week. However as always over key data and political events, it's essential to let the price action tell you what the trend or sentiment towards a particular instrument is, rather than second-guessing. Moreover, it will be important to be disciplined about trade sizing, money management and the placement and observation of stop losses during this period.


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