Dollar rebound may have some legs

Dollar rebound may have some legs

The Dollar has been experiencing some love coning into the new year, with the DXY up just under 1%. However, is this just a technical rebound, or is there substance for a further rally?

Technical show the Dollar is in a historically congested

DXY’s Historical pattern

The DXY is currently in a zone where the Dollar has historically consolidated before making a move lower or higher, evidenced by its price movement earlier in 2018. This historical pattern was also prefaced by a strong move downward from all-time highs, which we are currently seeing. This makes sense, as strength in the Dollar usually comes from a sharp exit out of risk assets and more stable assets such as the Dollar.

DXY 88 is a historical-critical support

Correlation between DXY and the NASDAQ

Before the end of 2014, the DXY struggled to clear 88 after ten years of relative dollar weakness. Coincidentally (or not), this was also the ten year period where the NASDAQ stayed below its all-time high during the bubble of the 2000s. However, once equity markets started their legendary rally in 2013, the Dollar soon followed. It seems like the Dollar follows US equity markets in a laggard fashion due to investors buying into hot US equities after they start to become expensive. Assuming you’re bullish on equity markets, are we going to see a yearlong bull run in the US dollar?

Dollar has headwinds against it

I have stated before that the Dollar has some fundamental headwinds such as Inflation, Quantitative easing, Low-interest rates, and an appetite for assets such as Gold. But these headwinds are irrelevant if global investors increase their appetite for US equities. However, institutions are ratcheting their bets against the Dollar, which has brought bets against the US dollar to an all-time high.

Vasileios Gkionakis, head of currency strategy at Lombard Odier, stated that “The speculative community is very short right now, but there is a good reason: because fundamentals still point to a weaker dollar in the medium term,” stating that the Democratic Party’s 1.9 Trillion Stimulus will push the Dollar down.

Speculate bets against the Dollar may induce a short squeeze if overseas investors plow their capital into US equity markets.

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