The US Dollar index staged another sharp rally today and is now up 16.35% from its lows back in March. The Euro is down more than 16% from its highs earlier this year. For those that have plans to go to Europe anytime soon, at least it's 16% cheaper for now. Unfortunately for foreigners coming here, it's the reverse.
Less than one year after supermodel Gisele Bündchen started only accepting payment in Euros, the US Dollar is soaring today as financial troubles spread across the globe. In addition to having its best day ever versus the Euro since that currency was introduced in 1999, the US Dollar index is also having its eighth best day since 1971.
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Today's intra-day decline of 1.37% in the US Dollar index would make it the 15th worst one-day decline for the currency over the last ten years. However, as shown in the chart below, today's declines haven't even put a dent in the uptrend that has been in place for the currency since its rally began on July 15th.
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Below we highlight price charts of three currency ETFs that had been in uptrends since their inception until recently. The Australian Dollar ETF (FXA), British Pound ETF (FXB), and Euro ETF (FXE) have all suffered big declines over the last few weeks. These trendline breaks are bearish for technicians, and they provide an even bigger signal that the US Dollar tide has turned.
The US Dollar index has made a "golden cross" today, as its 50-day moving average has crossed above its 200-day moving average as both are rising. The "golden cross" is viewed as a positive by market technicians, as it is thought to signal a significant favorable turning point. Regardless of your thoughts on technical analysis, the chart below highlights a clear shift in the Dollar over the last few weeks.
We recently highlighted how the Dollar has performed following all prior "golden crosses" at Bespoke Premium. Click here to subscribe and view the report.
Since our post on the Dollar breakout last week, the currency has continued its trek higher. It is currently trading well into overbought territory, however, and is also up ten days in a row for just the fifth time since we have daily pricing going back to 1971. The last ten-day winning streak for the currency was all the way back in May 1990. The currency has gone up eleven days in a row just twice, and it has never been up twelve days in a row. While we expect the uptrend to continue for the Dollar, it can't go up every day.
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The sharp rally in the US Dollar index over the last few weeks has put it 4.43% above its 50-day moving average. As shown in the chart below, the spread between the Dollar and its 50-day is at its highest level since mid-2000. While we believe the currency will remain in an uptrend over the next few months, it is probably due for a short-term pullback.
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The US Dollar index has now been up for 7 days in a row. This has now happened 24 times since 1970, and as shown below, the median return on day 8 and over the next week have been minimal. Recently, the numbers have been more negative, however. Six out of the last seven similar winning streaks have seen the Dollar fall on day 8 and over the next week.
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The US Dollar index is now up 6.33% since bottoming on April 22nd, making this the first rally of more than 5% since the 14% rally that ended in November 2005. The previous decline of 22.75% without a 5% rally was the second longest for the currency since daily pricing began in 1971. As shown below, the average 5%+ rally for the Dollar lasts 186 calendar days and sees a gain of 12.95%. The current rally of 6.33% has lasted 108 days.
Given the dollar's recent strength, there has been some concern that exports, the one bright spot still underpinning the economy, will get hurt. While a stronger dollar certainly makes US goods less attractive relative to foreign products, you would need to see a much bigger and longer rally in the dollar before the positive benefits start to reverse themselves. Additionally, while exports would get hurt, the US imports more than its exports, therefore on a net basis the portion of the economy that benefits is greater than the portion that gets hurt.
A look at the historical record also shows that a strong dollar is much better for stocks than a weak one. Below, we highlight a chart from prior reports we have sent out to Bespoke Premium subscribers. Since rallies and declines in the dollar are typically measured in years rather than weeks or months, the S&P 500 has averaged positive returns during both dollar bull and bear markets. However, equity gains during dollar bull markets (20% rally preceded by a 20% decline) are much greater than dollar bears (20% decline preceded by a 20% rally). As shown, the average return of the S&P 500 during dollar bull markets is over 80%. During dollar declines, the average return is less than 20%.
Two days ago we posted on the recent breakout for the US Dollar and its positive implications. Today the Dollar is having its best day since July 2005 with a gain of 1.167%. As shown in the charts of the Dollar index and the Euro below, the trend sure looks to be in the Dollar's favor for the time being.
Yesterday we sent out a B.I.G. Tips report highlighting our belief that the Dollar was set for at least a 10% rally. In the report we highlight how to play the rally with ETFs and stocks. Click here to subscribe to Bespoke Premium and access the report today.
The US Dollar index closed just above its 200-day moving average today for the first time since October 2006, and also just above its high from mid-June. The breakout of its trading range that had been in place since March is a win for Dollar bulls.
About a month ago, we posted a chart on the US Dollar pointing out that bulls should treat a rally in the currency as a marathon and not a sprint. After declining in the latter half of May, the Dollar was able to hold the bottom of its newly formed uptrend and head slightly higher again. Below we provide a chart of the currency, highlighting its trend channel. If things continue in their current direction, we have a little more to go on the upside before the Dollar reaches the top of its range.
Even after crude oil's three dollar plus decline today, it and other energy related commodities remain in short-term overbought territory. The chart below is published each morning as part of our Daily Morning Lineup, and it shows the current levels of major currencies, fixed income, and commodities versus their typical trading ranges. For each asset we show the current level (circle) as well as the change over the last week (tail). When the circle is in the white area, it is considered neutral, while readings in the pink and red areas indicate overbought levels. Conversely, readings in the green areas indicate oversold levels.
As previously mentioned, energy related commodities are all still in overbought territory even after today's declines. The dollar is in neutral territory versus the Euro and Yen. In the major metals, gold and silver are both in neutral territory, while copper is oversold. Finally, US Treasuries remain weak as both the 2-year and 10-year notes are in oversold territory.
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The US Dollar has come in favor to many Wall Street participants in recent weeks. As shown in the charts below, the short-term action of the currency has been bullish, but the longer-term technical picture remains bleak. Using one of the oldest sports cliches in the book, Dollar bulls need to treat this as a marathon and not a sprint.
At its current level of 73.54, the US Dollar index is trading just off the bottom of its long-term downtrend. The next level for bulls to watch is the top of that downtrend at 77. If the currency can break above there, the marathon for a strong Dollar will be about 10% complete.
Both the 10-Year Treasury yield and the US Dollar index are at technical tipping points. As shown in the first chart below, the yield on the 10-Year is hitting resistance at the top of its downtrend line. Since stocks have been moving up as Treasury yields have risen (and fallen as yields have fallen), it would be nice to see this downtrend broken.
While it's hard to find many positives with the chart of the US Dollar, it has at least made a short-term bottom in recent weeks and is currently in a "flag" pattern. When this happens, the price eventually breaks big to the upside or downside.
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Below we highlight the Gold/Dollar ratio since 1975. This divides the US Dollar index (DXY) into the price of an ounce of Gold. As shown, recently we took out the prior highs of the ratio made in January 1980, and things have now gone completely parabolic. Things don't stay like this forever, and those who have recently joined the party and entered the long Gold/short Dollar trade should tread very carefully.
The US Dollar Index is now trading more than 2 standard deviations below its 50-day moving average and is as oversold as it has been since April 2006. As shown below, however, it has even further to go on the downside before it reaches the bottom of its downtrend. The pain of rising oil prices, rising commodity prices, falling stock prices and the falling dollar continues.
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The recent tick down in the US Dollar index has moved the currency well into extreme oversold territory once again. As shown in the first chart below, the US Dollar is trading well under 2 standard deviations below its 50-day moving average (bottom of green zone). The currency has now been declining since the start of 2002 and recently broke to record lows as shown in the second chart below. It certainly hasn't been a good decade for the greenback. Will this thing ever go up again?
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Since we do them for sectors, commodities and foreign equity markets, we figured we would create our trading range charts for some of the major currencies. For those unfamiliar with these charts, the red zone represents 1 to 2 standard deviations above the currency's 50-day moving average. A move into or above the red zone is considered overbought. The green zone represents 1 to 2 standard deviations below the currency's 50-day moving average, and a move into or below the green zone indicates oversold territory.
To make the charts apples to apples all the way through, for each chart we use US $ per foreign currency. For the US $, we use the US Dollar index. As shown, the dollar has actually begun to stabilize, and it has broken its long-term downtrend. Currently, the currency seems to be in a consolidation period and definitely looks better than it did a few months ago. While the dollar has begun to stabilize, the Euro remains in a longer-term uptrend, but it has also made a series of lower highs. The British Pound has really had trouble lately as their economy has struggled. The Japanese Yen and Russian Ruble remain in uptrends versus the $, while the Canadian Dollar, which soared versus the US $ in 2007, has formed a short-term downtrend.
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Over the last two weeks, there have been two developments which the consensus would have said would be a blow for the dollar. Last week Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn both gave indications that the Fed was at the ready to continue cutting rates. Many suggested that if the Fed was going to open the monetary spigot further, the dollar's decline would only get steeper.
This week, news of the Treasury led bailout of sub-prime borrowers surfaced and was formally announced today. When the news first surfaced, many critics said that a re-write of sub-prime mortgages to bailout irresponsible borrowers would cause foreign investors to lose confidence in US denominated assets, which would in turn hurt the dollar.
Through both of these events, the dollar has not declined. Instead, it has actually risen 1.75%. While that may sound modest, it is actually the largest one-week move in the commodity since January.
We're currently working on our 2008 outlook, The Bespoke Report: Everything Investors Must Know About the Markets in 2008. One of the numerous charts we are using is a historical comparison between the US Dollar and the price of Gold (as shown below). A lot of times, a simple chart is worth more than any amount of commentary that market gurus can write. We think this is one of them. But we want to know what Think B.I.G. readers think about it. Let us know in the comments section below if you have any input.
(For those looking to receive our 2008 outlook when it is published, you must be a Bespoke Premium member.)
After breaking below $90 per barrel, oil has continued lower and now looks to test support levels at $84. We expect an initial bounce off of the $84 support level, but the commodity has now broken its uptrend from the August lows, so we expect sideways action over the next month or so.
Don't look now, but the US Dollar index (DXY) has broken its nasty downtrend from mid-Summer after rallying 3% since its 11/23 lows. It now has support at 76.2, and if it can hold there, an uptrend will be in place.
With the US Dollar index falling even lower today, below we highlight the historical bull and bear markets of the currency. As shown, market cycles for the currency are longer than some of the other asset classes that we have looked at. The average bull market for the US Dollar is 1,710 days long for an average gain of 48.90%. The average bear market is 1,610 days for an average decline of 31.84%. Based on these averages, the current bear market is both longer in duration and more extreme in its decline. Since the current bear market in the US Dollar started in July 2001, currency has declined 37.69%.
Below we highlight a historical price chart of the US Dollar index. As shown, we're currently at record lows. However, the currency isn't nearly as oversold as it has been in the past based on its distance from its 50-day moving average. Currently, the US Dollar is 2.25% below the bottom of it trading range. As highlighted in the second chart below, the Dollar has reached oversold levels of 3% to 4% quite frequently.
