Oct 26, 2022
VOT Research Desk
Market Insights, Considerations & Analytics
Not only is a dollar peak possible, but it is also likely; a weaker dollar would make almost all assets less valuable.
the current state of the dollar, which is oscillating above and below what we consider to be a key pivot price of 113.40, as well as the effects that result will have on other assets. Here is a link to the analysis in case you want to review it.
Let’s examine the subject using some illustrations of the powerful inter market linkages.
The majority of assets are trading against the dollar.
You are indirectly trading the U.S. dollar whether you are engaging in currency or commodity speculation, protracted stock and bond investing, or both. For instance, the S&P 500, Nasdaq, Dow, and 10-Year Treasury note futures settle nearly 90% of the time in the reverse way of the US dollar index traded on the ICE market (according to data compiled over the previous 60 trading days).
It should not be surprising that changes in the dollar’s value impact the values of the corresponding assets, but the extremely disciplined correlations are probably the result of algorithmic trading programs, overzealous hedging, and momentum speculation rather than the supply-demand or economic reality of the underlying securities.
We’ll let the charts speak for themselves because they say a picture is worth a thousand words. The intraday charts showing the link between the E-mini S&P 500 futures contract and the U.S. dollar index futures contract are nearly identical to one another.
In this time frame, we can see the strong negative correlation throughout numerous trading sessions starting in late July. Each price bar on this chart represents 360 minutes, or six hours.
The link between copper futures and the U.S. dollar index futures contract exhibits a similar pattern of activity.
The chart below uses six-hour price bars to show intraday prices going back to late July. The forex market should only have a little influence on copper prices, yet it is acting as if it is the only determinant.
When we contrast the 10-Year note to the U.S. dollar on a daily chart, we can see that the overall result in Treasuries and, consequently, yields, is likewise closely related to the dollar. The increase in the value of the dollar starting in August has made Treasuries more volatile (lower Treasuries and higher yields). Only the short halt in dollar purchases in September brought some solace to Treasury holders.
Examining the Weekly Dollar Chart One More Time
It was confirmed by Friday’s finish below 113.40 that a dollar top is not just conceivable but likely. Of course, there are no assurances in market analysis, and unknowable information might instantly alter the outlook for the market. However, the dollar bull’s sails have lost their wind.
Along with trendline resistance, we also observe a regular bearish difference on the relative strength index (RSI), an oscillator that displays market momentum visibly and aids in spotting lengthy and frequently unsustainable price movements.
It is referred to as diverging when the RSI hits an excessive high and subsequently makes lower highs while the underlying asset is making higher highs. Despite extensions in the price trend, this is typically a sign that fundamental strength is weakening. Prices are hence frequently susceptible to ferocious mean reversal.
Natural gas futures, which lost 40% of its value once prices started moving an other way, provide a recent illustration of how powerful the conclusion of persisting divergence can be.
The oscillator on a weekly chart is still close to 70, which typically proves to be transitory because prices are likely to correct with such a lofty RSI signal. This is true even if the RSI made lower highs on the most recent dollar rise. A logical aim would be close to 105.00 if we are correct that the greenback would eventually die.
This designates the weekly linear trend that excludes the inflated pricing that took place in March 2020, when Covid shutdowns shook the world. A round-trip to 97.00 is a reasonable possibility, though. In response to the conflict in Ukraine, the dollar index began to rise in this region in late February 2022.
To sum up
Even if everything else is equal, a lower currency would cause the plough on almost all assets to unhitch. In other words, many assets may appreciate solely because the value of the dollar declines, even in the face of continued inflation, high interest rates, and political unrest.
The equity market and Treasury bonds will obviously benefit, but undervalued commodities like softs including coffee, cocoa, and cotton, like wheat, soybeans, and energy. Metals like gold, silver, and copper will also benefit – similarly, The Energy
In other words, holders of assets other than cash will support a declining US currency.
