I chart DX every day and post an update more often than not. But, with the FOMC and the BoJ both meeting this week, it seems like a good time to look at the big picture for the greenback.
Last May [see: Update on DX: May 6, 2016] we noted that DX was at a crossroads. Its future depended on whether CL or USDJPY would step up and fuel stocks’ next leg up.
If you believe CL will break out again and deliver SPX to new highs, then DX breaking down here would make perfect sense. If, on the other hand, the BoJ has seen the folly of its ways and is about to breathe new life into the yen carry trade, then DX will surely break out.
As it turned out, USDJPY stepped up to the plate and rallied through the remainder of the month. And, after a few days of waffling, CL rallied through June 8. So, DX broke out, but only rallied through the end of May when USDJPY topped out.. At that point, it bumped up against the top of the falling white channel and spent the next several weeks backtesting the gray channel from which it had broken out.
As the chart above shows, DX took the 2nd backtest on June 23 and used it to form the bottom of a rising channel (white) that has since guided prices higher.
The following day saw DX rally 3.95% after the Brexit results came in, lifting it up and out of the falling white channel as well. By the time it got done rallying, that rising white channel was looking pretty solid. But, is it? Can it maintain its momentum if the FOMC doesn’t raise rates?
continued for members…
The rising white channel peaked just above the yellow .618 on Jul 25 and began forming a falling channel, shown below in red. It fell within the red channel until breaking down on Aug 18 — the first of five prop jobs to get/keep it back above the rising white channel bottom.
Most of those stick saves corresponded with a Fed president jabbering about the importance and likelihood of raising interest rates. It might have been funny if it weren’t such a clear indicator of a broken and manipulated market.
Given that DX reached the yellow .618, I automatically started looking for another leg up to the .786 (a Gartley Pattern) or the .886 (a Bat Pattern.)
However, the breakout from the falling red channel has been quite underwhelming. The first effort failed, and the second was stopped by a little trend line (white) off the two most recent highs.
With two very important central bank decisions this week, DX has taken that falling white TL, paired it with the opposing rising TL connecting recent bottoms (in red), and formed a consolidating triangle. It’s a very common pattern in the days leading up to a central bank decision.
Forecasting DX is all well and good. But, what I really want to know is “what does this tell us about what to expect later this week?”
If currency traders — usually the smartest guys and gals in the room — are trying to dump DX, and the only reason it hasn’t fallen apart is that the Fed keeps propping it up, then:
1. we’re unlikely to have a rate hike in a few days; and/or,
2. the BoJ is unlikely to ease further; and/or,
3. the EURUSD is likely to head higher.
I’ve trotted this theory out a few times, and it still makes sense to me. The Fed wants all the benefits of a higher dollar without having to actually raise rates. Why? They want to be able to continue to say we need more inflation. And, that’s a tough argument to make if the dollar is tanking and oil prices are rallying.
The Fed understands all too well that rising stock prices rely on higher oil prices or a higher USDJPY. If USDJPY goes up, that means the yen is losing value — which means that oil prices must come down or Japan will run into the same problem. The rationale for massive easing falls flat on its face.
If oil rallies, however, then USDJPY can continue lower. The stronger yen will accommodate the rising price of oil. But, if it comes at the expense of a weaker dollar, the Fed has problems. So, how to get a stronger yen without prompting dollar weakness? That’s right, euro weakness — which is exactly what we’re facing.
EURUSD’s rising purple channel broke down after Brexit, backtested for the next two months, and has broken down again. If the channels and harmonics have anything to say about it, it has a long way to go.
Between Feb 11 and Mar 10, a 4.9% EURUSD decline enabled a 48% rally in CL. Again, between May 3 and May 30, a 4.5% EURUSD decline prompted a still impressive 16.2% rally in CL. The only time it didn’t really work was the Brexit, when pretty much everything plunged for a couple of days.
I like this scenario, but have to admit there’s little certainty about what to expect from the BoJ or FOMC. While we know what would be best for stocks, there have been times — notably last December — when the FOMC feels they have to work on their credibility. This could easily be one of those times.
A quick glance at the last twenty years shows the field is wide open in either direction. Though the purple midline has provided good, strong resistance, the red channel midline is good, strong support. The harmonics probably favor the downside. And, then, there’s a simple, unassuming horizontal line of support at 92.50 which shouldn’t be ignored.
I’ll leave you with one last thought. When TPTB ramp something significantly higher in the days and weeks leading up to a big decision, it usually means they want to get a little cushion under it to absorb some disappointment. It’s not a rule…more of a guideline. If it applies here, then DX will be testing 90 soon enough.
Stay tuned.