Rarely, do multiple charts point to the exact same outcome. When they do, I pay strict attention as it means something big is about to happen. And, more often than not, it flies in the face of the conclusions one might draw from fundamental research.
Such is the case with the US dollar and a handful of related charts: the DXY, EURUSD, interest rates and gold.
The falling US dollar has been in the news almost daily, as a series of FOMC rate hikes have done nothing to prop it up. In fact, the past year’s hikes have done a great job of signaling further declines — a point we made just last month [see: Will the FOMC Minutes Save the Dollar?]
With more hikes presumably on the way (the Atlanta Fed just raised their Q1 GDPNow forecast to 5.4%), one might assume the dollar might continue falling.
Equally newsworthy, these days, is the meltup in interest rates. I’ve seen numerous warnings of rates spiraling out of control should the 10-yr top 2.5%, 2.65%, 2.75%, etc. While it’s true that TNX popped up past a long-term trend line in January, it wasn’t the line that mattered.
Here’s how I see it playing out.
10-YR Note Yields (TNX):
Some would argue higher rates are a good sign of a rebounding economy and surging confidence. I would agree, if the US weren’t on the hook for $21 trillion (a multiple of that if we count the off-book liabilities.)
I see TNX running out of juice around 2.856 — the .382 Fib retracement of the drop from 53.16 to 13.36 where it intersects with a channel line from prior to 2000. It might seem somewhat arbitrary, but will hopefully seem less so after we look at DXY and ZN.
Note that the midline of a rising channel (red) also passes through this same level. This is a bit of a cheat, since the channel broke down in early 2016. But, it broke down for a reason, and has since respected that midline.
If I’m wrong and TNX rises through 28.56, the next more serious resistance isn’t until 36.50. But, I think it’s much more likely we get a significant reversal here.As an aside, note that each plunge in 10-yr rates corresponded with a plunge in stock prices…except one: the 2014 decline (purple arrow.)
This particular plunge was offset by a critical breakout in USDJPY (in service of the yen carry trade) and allowed SPX to break out past resistance for a 14.8% gain. And, while we’re looking at USDJPY, note that it recently reached important support at the bottom of the steeply rising white channel. In fact, it has dipped slightly below the channel bottom. It’s as strong an argument as I can think of for the US dollar to bounce here. Look for the BoJ to go for broke with its next iteration of QQE.
10-YR Note Prices (ZN):
This one is fairly clear cut in the near-term, but less so further out due to an overshoot in 2011-2012 (when USDJPY plummeted in the wake of Fukushima.) The key chart pattern here is the (slightly) falling white channel which intersects with the rising white channel .236 line at 120’315ish.The only hitch with this chart is that the yellow channel originally suggested by the 2012 highs would result in a midline that makes no sense at all. If we write off the yellow channel and go with the white one (which features a well-placed midline supporting ZN between Sep 2013 – Nov 2016) then we end up with a three way intersection right at 120’315.With any luck, ZN will tag that level at about the same time TNX is tagging 28.56. If I’m wrong, we should know it pretty quickly and can then set our sights on the bottom of the yellow channel, probably much later in the year at 119’180.
Though the yen is more important to equity prices, the euro is more important to the US dollar. The EURUSD just poked through the neckline of a huge Head & Shoulders Pattern, but is running into the top of a large falling channel (in red) that dates back to 2008 as well as a key Fib level at 1.2597. It wasn’t initially clear whether or not the pair would wait for the Fib and the channel top to intersect with the neckline. So, while I’m fairly confident in the price, I’ve been uncertain about the timing.
The Dollar Index (DXY):
DXY ties it all together in a nice, neat bow. It fell from 2001 to 2008, and has since been in a rising white channel. Following Fukushima, however, DXY fell enough to establish another rising channel, shown below in purple. That channel has determined almost all of the important highs and lows since April 2011. Though, between Apr 2014 and Apr 2017, an important trend line (purple, dashed) took over. When that trend line broke down last April, it signaled the 11% drop we’ve seen over the past 9 months.
Last May, it wasn’t clear whether the white midline would hold. But, it was important enough to serve as a downside target [see: Update on US Dollar, May 1, 2017.]
This past Friday, DXY dropped through the white midline, came within .015 of a key Fib level, then popped back above it. It seemed as though the purple channel bottom tag might have to wait [see: US Dollar: Capitulation?]
Today, it dropped back down through the midline at the very same time that TNX and EURUSD moved up through their necklines and ZN started dropping like a rock.
To make things interesting, gold is even creeping higher after a breakdown of its rising channel from December. There’s no guarantee, of course, that DXY will bounce at the support offered at 87.259-87.365. There’s also no guarantee that the 10-YR will run out of steam or that EURUSD will reverse. But, I’m pretty sure that gold won’t be allowed to rise above 1380 — the neckline of an Inverted Head & Shoulders Pattern dating back to Sep 2013 that points to 1720.
The folks pulling the levers on the markets are very good. But, they’re not perfect. If I’m wrong about all the above, it would mean that DXY, TNX, ZN and GC all have much further to go. It might also mean that the Fed has lost control. Higher inflation and interest rates could dominate the investment landscape for many months, if not years.