Technical Analysis Points To US Dollar Upside Potential

by Chris Vermeulen of The Technical Traders

Article Highlights:

  • The US Dollar Presidential Price Cycle indicates rising US Dollar
  • The US Dollar is not the best asset, but rather the best of all currencies
  • Price Relationships Suggest The US Dollar Is Currently Undervalued
  • How The Presidential Price Cycle May Create Opportunities in Precious Metals and the US Stock Market

It’s been a while since we published an article about the US Dollar and this is the perfect time to discuss that is likely to happen over the next 6 to 18+ months.  The US Presidential Election is just around the corner and traders/investors are certain to interpret the uncertainty of the US Presidential Election cycle, and the pending policy and liability related changes, as a warning that equities and the US Dollar may be in for a wild ride over the next 6+ months.

UNDERSTANDING GLOBAL CURRENCY “SHININESS”

Typically, the US Dollar declines over the 6 to 12+ months prior to a major US Presidential election cycle.  Whenever there is a major contest for a new US President or an active and aggressive campaign between two individuals, there is a lot on the line. A US Presidential Election is not just about electing a President – it is about setting US, Foreign, Social, Economic, and Taxation polities well into the future.  How businesses and voters interpret the benefits vs. risks usually decides the outcome fairly openly.  Yet, global traders vote by deciding how much they believe in the policies and leadership in the new US President and/or how they interpret the risks related to new policies, laws, and regulations.

The US is a major driver of global economic growth throughout the world.  The US leads the four other large mature economies by 8.5% to over 20% when compared by global GDP.  China is the closest economy to the US, yet it still falls nearly 8.5% behind the US economy annually.  Even if we were to combine China, Japan, Germany, and India into one economic block, it would beat the US economy by only 5.5% annually.

This is why, at least for now, unless some other global economy rises to the level to dramatically threaten the US economy, the US Dollar will likely continue to sustain value and dominance throughout the world.  It also aligns with my “Shiniest Pile Of Poop” theory.  Yea, I know that is a horrible name for a currency valuation theory – but it helps us understand how currencies (and other commodities) are processed in the minds of consumers and traders.

A simple example is that of having to dig through the garbage trying to find something to eat (again, a horrible example).  Yet, within this example, any human would automatically start ranking the quality of the garbage attempting to determine which items were the “best quality” – even though they are all trash.  This process comes naturally for anyone in this position – you simply must select the best items in the pile of trash as potential food items.

How does this relate to currencies? Even though certain currencies may become more attractive from time to time, as traders find value in them and perceive stronger future prices, the reality is that major global currencies will always be considered “shinier” than others. Keep this in mind as we explain our thinking related to the US Dollar going forward.

REPEATING US DOLLAR CYCLES

As we can see from the chart below, the US Dollar reacts to US Presidential Election cycles by typically weakening 6 to 12+ months prior to the election date.  Each of the last three US Presidential Elections was predicated by a declining US Dollar value and a rise in the US stock market.  In 2012, there was virtually no active challenger to Obama’s second term – the expected US Dollar price rotation was rather muted.  In 2016, the US experiences once of the most heated and aggressive Presidential campaigns between Hillary Clinton and Donald Trump – the expected US Dollar price rotation was much larger.  Currently, as the Presidential Election cycle heats up, we expect a similar range to the 2016~2018 US Dollar price range.

The initial downside selloff in the US Dollar appears to be nearly complete.  The second phase of the US Dollar Election cycle should prompt a moderate upside price move in the US Dollar while the US Stock market stalls ahead of the 2020 US Presidential Elections.  Our researchers equate this to the uncertainty and potential liabilities of a change in the Office of the US President and the implications related to new policies, taxation, regulation, and other future changes.  Traders move into safety within the US Stock market while higher-risk sectors weaken.  Essentially, everyone attempts to “place their bets” as to the outcome of the US Presidential Election cycle.

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PART II: DOLLAR UPSIDE POTENTIAL

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  • Presidential Election Cycles Drive US Dollar Trends
  • US Stock Markets Rally or Selloff After Presidential Elections Based On Perceived Optimism Or Risks
  • Price Relationships Suggest The US Dollar Is Currently Undervalued
  • How The Presidential Price Cycle May Create Opportunities in Precious Metals and the US Stock Market
  • US Dollar Price Channel In Focus

In Part I of this research article, my research team highlighted the Presidential Election cycle and what we believe is the most likely outcome for the US Dollar and the US stock market going forward for the next 3 to 6+ months.  As we continue to explore our data and charts, we hope to more clearly illustrate how the Presidential Election cycle relates to opportunities and trends in the US Dollar and the US stock market.

MASSIVE PRICE ROTATION IN THE US DOLLAR & SPY

We believe this downside price move in the US Dollar is related to the upside price move in the US Stock Market and support of foreign currencies after the incredible recovery in US Stock Market price levels over the past 4+ months.  As investors are drawn into the US stock market within rallies, many traders ignore the trends in the US Dollar because the gains achieved within a stock rally are superior to the risks/liabilities of US Dollar price changes.  Since the March 20, 2020 peak in the US Dollar, the dollar has fallen nearly 10% to levels near 93.10.  Meanwhile, the SPY has rallied over 51% over that same span of time.

This Weekly US Dollar chart, below, highlights the competing trend channels that are currently driving the sideways price activity and recent lows.  The US Dollar has broken below the upward sloping price channel/fork and is well within the middle area of the downward sloping price channel/fork.  The recent lows appear to be very close to the longer-term lower price trend line which is acting as support.

What we believe is happening, right now, is that the US Dollar is establishing a price low near a current Lower Price Support Channel.  We believe this is a technical price move related to the support and trend in the US stock market that initiated just before and throughout the COVID-19 virus event.  Prior to the start of 2020, the US Dollar was trending moderately lower, near 97.  As the COVID-19 virus event became more of a concern, the US Dollar rallied to levels just below 100.  Then, when the collapse in the US stock market started near February 25, the US Dollar collapsed to levels near 94.60, before rallying to a peak near 103 (an 8% swing in price).

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The disruption in the global markets sent shock-waves throughout the currency markets as traders and investors suddenly realized “this is not just a US/China issue – this event targets everyone on the planet”.  We believe the rally in the US Dollar after the March 20, 2020 bottom in the market reflected the confidence of global traders/investors believing that the US Federal Reserve was acting in a manner to help support the planet at a critical time in our history.  There was no other institution on the planet that could have engaged in a more efficient and effective means of supporting the global crisis that was unfolding at that time.

Since that peak level near 103, the US Dollar has trailed lower as the US stock market recovery focused everyone on the gains in technology and various sectors.  Now, with the US Dollar near a support channel and with the US Presidential Elections just 60+ days away, we believe the focus will shift away from stock market gains and move more toward protecting assets, currency valuations, and future expectations (reflecting the perceived US election results).

Please take a moment to review the charts and data we provided in Part I of this article, where we illustrate a price pattern that appears to be rather consistent in the US Dollar near Presidential Election cycles.  We believe the current low in the US Dollar is the first leg of this pattern and the next leg will prompt a moderate upside price trend in the US Dollar lasting up to, and possibly through, the November 3 election day.

If our researchers are correct, this upside trend in the US Dollar will conversely reflect a moderate price consolidation, and/or downward price trend, in the US stock market.  This type of pattern would suggest that precious metals could continue to climb as FEAR starts to drive traders/investors away from allocating large positions/trades prior to the contested election cycle.  If we are correct, traders will pull capital away from risk, move it into safe-haven assets (precious metals, bonds, the US Dollar, and others) which will reflect the completion of the second leg of this US Dollar price pattern.

After the elections are completed and settled (which we hope happens without too much difficulty), then traders begin to reposition their assets based on what they believe will be viable opportunities given the new policies, promises, and direction of the US economy.  Remember, the US economy is still the largest and most effective driver of global growth on the planet.  As much as many people may not want to admit it – what the US does drives global growth and optimism.  As we’ve suggested before in other articles, we believe the current “shake-out” in currencies, stock markets and debts/liabilities will result in a very strong price trend setting up for the US Dollar and major global stock markets sometime near late 2021..  are you ready for it?

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Stay safe and healthy!

Chris Vermeulen
Chief Market Strategist
Founder of Technical Traders Ltd.

NOTICE: Our free research does not constitute a trade recommendation, investment or trading advice, or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  The Technical Traders research team produces these research articles to share information with you in an effort to try to keep you well informed.  Visit our web site (www.thetechnicaltraders.com) to learn how to take advantage of our members-only research and trading signals.