US Dollar: Capitulation?

When it comes to trade, there is no free lunch.  A lower US dollar helps US exporters.  But, for the US – a net importer by a huge margin – it raises the price of imports.

So, it was really interesting to watch Treasury Secretary Mnuchin step in it explain that a lower USD would be “beneficial to our trade imbalances” without mentioning the offsetting, and more troubling, inflation and interest rate repercussions.

If we didn’t have $21 trillion in debt (multiples of that off-book) in a rising interest rate environment, it probably wouldn’t matter.  But, the CBO’s numbers, which assume 10-yr rates top out just over 3% (half the historical average), argue otherwise.

Mind you, I’m not complaining.  I’ve been bearish on the USD for a very long time.  In May 2017 [see: May 1 Update on US Dollar] we noted that DXY had broken below a long-term trend line and was susceptible to more downside.

…if DXY drops through the SMA200 and the yellow TL, then we have some very obvious Fib targets including the .786 at 97.583, the .886 at 96.789 and the purple .618 where it intersects the purple channel midline at 96.465 in July or August.  If the purple midline breaks down, the next major support isn’t until 91 in early September and 87-88 as early as the end of the year.

We’ve seen plenty of worrisome bumps along the way, with a couple of timely rallies in Q4 to support stocks.  But, our charts have remained bearish even as the Fed, with its ineffectual rate hikes, struggled to argue otherwise [see: Will the FOMC Minutes Save the Dollar?]

DXY just tagged our 87-88 target, reaching 88.438 moments ago with its eye on the rising purple channel bottom around 87.423.As we discussed in yesterday’s updates on EURUSD and USDJPY, the big question is what now?  The charts offer a compelling answer.

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