Dollar Index in 2020: Is the COVID-19 pandemic killing or reviving the US dollar?

Intermediate

The year 2020 has become synonymous among many economists with the word ‘uncertainty’. Since the start of the year all the economic projections for the world from IMF were reduced to laughable anecdotes. As the turmoil of the pandemic hit the world economy and stock market (stock market and economy are not really related anymore), the ever-present USD became the primary mechanism for the US government to prevent, or delay depending on who you ask, the collapse of the stock market and US economy. The biggest emission of US dollars in history added trillions of USD to the economy in the form of bailout packages to keep businesses and industries afloat as the economy was forced to shut down.

But was that how that money was used? Starting from April we had the biggest market rally in decades as newly printed dollars went into stocks and bought them on the cheap. Tech sector has become the new gold rush and talks circulate of it being the new bubble ready to burst soon as NASDAQ 100 is being squeezed for profits at new all-time highs, while other equity sectors struggle. The bullishness of some stocks is ridiculous. Look at Tesla! Does that stock price make any sense? Despite the massive influx of USD into the system, we see continued growth in the discrepancy between the economy and the stock market. While stocks go up, companies continue to struggle, and bankruptcies and redundancies are common now. Big companies ask for even more loans to sustain themselves and the rich got a few times richer. New decade, same story.

Technical View and Wave Analysis

DXY weekly July 11 2020

Now let us look at the technical side of the DXY by looking at the weekly and daily charts. Since the DXY reached the lowest historical point by March 2008, at around 70.65, there has been a steady growth in the index as the economic recovery from the Great Recession required a strong and trusted USD, while other major currencies experienced a severe downturn. Elliott Wave analysis shows a clear count of 1-2-3-4-5 waves up, forming a single wave (I) in December 2016. The end of the bullish wave was in line with the start of the most unpresidential presidency in the history of USA. Now as wave (I) ended, we started the corrective wave (II), which goes in a-b-c formation. Wave ‘a’ had a clear 1-2-3-4-5 count and wave ‘b’ became a choppy rising channel mess of indecision as is usual for wave ‘b’. The start of wave ‘b’ was the initiation of the US-China trade war in 2018. Once again Elliott waves are showing the psychology of the market and world events. Notice the respect of the rising channel that started in 2011, not just the upper and lower lines but the middle line as well. A false break to the upside was the last attempt to push the dollar higher after the economies around the globe started to go into lockdown, looks like the end of wave ‘b’. Now price could be already in the wave ‘c’ move down, which is also a 1-2-3-4-5 formation. Current strong support is the weekly 200SMA, a strong bearish close below that is needed for more confirmation. Overall, the (II) wave could go at least 50% of wave (I), we shall take level 90 as a round number and 1st target and a formerly well-respected level.

DXY daily July 11 2020

On the daily chart, we see the potential start of the death cross. A signal of a potential major trend reversal as 50SMA crosses below the 200SMA, though we already had a death cross in January 2020, but the pandemic reversed it quickly. Could this also indicate that the USD was meant to have fallen already, but the pandemic delayed it? We also see a wave 1 in a clear 1-2-3-4-5 formation. The next major signal would be the break of the big rising channel. Intraday traders need to be wary, as USD is high on margin requirements so best to minimise risk and wait for major levels to break. Long term traders are probably already selling it.

Considering that summer is usually the quiet time, we may not see much reaction, but then again, the pandemic in USA is completely out of control and it could cause further downside. The biggest trigger of course is the upcoming election in November, a slap fight between Joe Biden and Donald Trump. The gloves are really coming off as the two candidates now use whatever methods to get ahead and smear each other in political excrements. At the end of the day both are so dirty, that voting seems like a pointless cause anyway. USD will react in accordance with the voting outcome, but the pandemic makes it hard to understand who USD’s favourite is.

Is DXY giving a sell signal for equities?

DXY S&P500 12 July 2020

Looking at the monthly chart of DXY (blue line) and S&P500 (orange line), it is clear that the S&P500 swings that started in 2017 do not have USD strength behind them, further pointing to the inflated equities bubble. DXY has been struggling and 50SMA is a clear monthly support here. Similar scenario was during the tech bubble. If you look at the correlation between DXY and S&P500 in early 00’s, DXY started losing its strength while the equity market had massive up and down swings as the market tried to squeeze profits. Eventually it led to tech bubble burst. Current price action is remarkably like that scenario. The main question is how much more profit can the market squeeze before the inevitable correction.

On the contrarian side, the sell off in USD may not happen yet, or will be delayed by the combined forces of the FED and the White House. Recent developments in the market indicate the highest level of price manipulations and price bubbles getting inflated. Many factors could influence the USD bullish momentum, from new stimulus packages to geopolitical tensions in Asia making USD an attractive safe haven. A lot depends on the political stance of the candidates and they way they choose to conduct their policies. It is for now unclear as to what USD level Biden and Trump deem necessary, hence the ranging wave ‘b’ we have had. The world is undergoing massive fundamental changes in the new decade and we are only at the start of it. Trading strategies require a lot of updates as traditional price action movements for the moment are rare. Going back to Elliott wave analysis, the last major shift in USD occurred due to political stance of the presidency, so the election this year could kick off the next cyclical move.

Editor

Anton is an accomplished Director at Markom Development Ltd where he combines cross functional competencies in staff management, operations planning, customer retention and strategy development. BU... Continued

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