Earlier this year the forex story was to be the long delayed rally for the US dollar, and as I outlined in a post some months ago when the dollar began to wake from its slumbers 2014, can now be characterized as a ‘game of two halves’. Since the midpoint of the year US dollar strength has returned in abundance with the USD index surging higher from the July low of 79.83 to trade at 87.28 at time of writing, having broken through several key resistance levels along the way and breaching the 87 level in the last few days.
This 4 year high for the dollar is perhaps only the start, and indeed we could be witnessing the embryonic stages of a major bull market for the US dollar. This trend for the dollar could extend for several years, given the imbalance between the US economy, backed by a hawkish FED and the prospect of sustained monetary stimulus in both Europe and Japan.
However, there are further consequences of such a sustained move higher for the dollar. These include the impact a strong currency would have on US companies dependent on exports, the levels of US investments in emerging markets with no regard to the associated currency risk, and in addition such a trend could damage companies in Asia who have borrowed heavily in US dollars. Furthermore, with the US dollar also having a role as a funding currency for the carry trade this too is likely to have a major impact as these positions begin to unwind.
For commodities, of course, the prospect of a strong dollar is likely to see further declines, with an acceleration in the bearish sentiment for gold and oil in particular, something we are already witnessing.
Whilst these may be the early days of such a rally, let us not forget the mega rally of 1980 to 1985 which saw the USD rise 90% before intervention which led to the Plaza Accord.
From a technical perspective, and taking the ‘long term’ view of 30 years it could be argued that we have seen over this period an extended bearish trend for the USD which has been in a consolidation phase since 2008 resulting in a pennant pattern on this chart. However, with the USD index now testing the 87 price region, any sustained move through this price region will then signal a breakout from this extended phase of congestion and build the requisite platform of support for a sustained rally. This may well mirror the technical picture last seen between 1999 and 2000 which saw the rally develop, breakout and climb to touch a high of 120. It is not too fanciful to believe the same could not occur, and in the medium to long term 105 now looks to be a possible target over this timescale.
Moving to a more manageable time horizon and the monthly chart for the USD index, the last four months have seen solid gains with only a minor pause in October, but even here the index closed higher at 87.03 and so far in November we have seen further gains. Looking ahead to the next levels of potential resistance the first of these is now at 88.81, followed by 89.72 if both of these are breached then the 92.53 high of 2005 becomes a realistic target.
By Anna Coulling
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