Has the Dollar Bottomed?
In light of a rather bold prediction by a well respected market analyst that the bottom is in for the dollar, I decided to have a look for myself. The great thing about technical analysis is if you have the tools to do the work yourself, never take anyone else's predictions at face value. Always investigate things for yourself and decide whether you agree or disagree.
In the daily chart of the dollar below, you will notice that I have labeled Elliott Waves as I see them. Elliott Wave is a tool that I use if I see a pattern. I am not an analyst that tries to slap an Elliott Wave count on every chart I see. If I don't see a clear pattern, I don't use it. Notice at the wave 3 low that price bounced off of the 61.8% retracement of the March 2008 - March 2009 advance. That was a logical place for traders to lock in profits and open the door for a short covering rally. Also notice that the high created on June 8 by the initial reactionary bounce off of the wave 3 low is still intact. The price action then consolidated in a weak triangular pattern before breaking lower once again. I have labeled the completion of that sequence as the wave 4 high.
Here is where things get interesting. If you project the length of wave 1 down in March 2009 from the wave 4 top, you get a projected wave 5 low of 74.48. That falls in a support band of 74.31 - 74.78 which contains external retracements, prior highs, and also a Fibonacci price projection method for support and resistance, not by using ranges, but by using actual major highs and lows. That is where we are going.
This technical outlook is backed up by three fundamental issues
In the daily chart of the dollar below, you will notice that I have labeled Elliott Waves as I see them. Elliott Wave is a tool that I use if I see a pattern. I am not an analyst that tries to slap an Elliott Wave count on every chart I see. If I don't see a clear pattern, I don't use it. Notice at the wave 3 low that price bounced off of the 61.8% retracement of the March 2008 - March 2009 advance. That was a logical place for traders to lock in profits and open the door for a short covering rally. Also notice that the high created on June 8 by the initial reactionary bounce off of the wave 3 low is still intact. The price action then consolidated in a weak triangular pattern before breaking lower once again. I have labeled the completion of that sequence as the wave 4 high.
Here is where things get interesting. If you project the length of wave 1 down in March 2009 from the wave 4 top, you get a projected wave 5 low of 74.48. That falls in a support band of 74.31 - 74.78 which contains external retracements, prior highs, and also a Fibonacci price projection method for support and resistance, not by using ranges, but by using actual major highs and lows. That is where we are going.
This technical outlook is backed up by three fundamental issues
- The dollar is now the borrowed currency in the carry trade.
- The European economy seems to be in better shape than ours right now on a relative basis
- The Fed said on Wednesday that they will keep the petal to the metal by keeping interest rates at or near zero
So while I do not have the notoriety of others making bold predictions, I will have to respectfully disagree.
I have been reading your blog for quite a while. Thanks for your analysis and insight. I have two questions in mind after reading this article.
1.) Do you try to determine Wave 5 is not going to be truncated wave?
2.) Regarding the US dollar carry trade, when people borrow US dollar, this creates demand. Then they will US for another currency, this creates supply. Shouldn't these two actions neutralize the effects of each others?
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Hi Peter,
Thank you for your kind words.
Wave 5 could indeed be a truncated wave, but we won't know for sure until the current price range is broken. My wave count is determined by taking the length of Wave 1 and projecting down from the top of wave 4 which I have as the July 8 high. If I do that and there is confluence with other price projection methods, it gives me a higher confidence level in using that particular wave projection. The whole key now is to watch the range. If 77.43 comes out, that means that my downside target is more likely to be reached. If 79.66 comes out on the upside, then it is safe to say that a bottom is in.
As for the carry trade, If the dollar is the borrowed currency, that means that the dollar is sold short, then the proceeds from the short sale are used to invest in other, higher yielding currencies, thus creating supply for the dollar and demand for the other currency. There are two things that should concern dollar bears, however:
- Sentiment is at a very extreme negative against the dollar right now.
- If there is even a hint that the Fed will raise interest rates, there will be one heck of a short covering rally as the carry trades are unwound.
So while I still believe that the dollar is going lower, those that short it here for speculation are playing with fire. The risk in this trade is very high.
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Wayne, do you still believe that sentimnet is negative toward the dollar given that interest rates will rise sooner than later? If interest rates rise in the next three months how will that affect the carry trade? Looking forward to your opinion--Teri
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Hi Teri - Right now I think it is more about the unwinding of the carry trade than overall sentiment. Sentiment gives a picture of market characteristics that simply tell us if the time is right for a reversal because every one is crowded to one side of the boat. The dynamic we will see now is that as the carry trade is unwound, normal market forces will push the dollar higher. As foreign governments and central banks back away from buying our treasuries, that will provide the upward pressure on interest rates.
The press keeps referrring to the 'safe haven' status of the dollar as the reason for its rise as doubts grow over Greece's sovereign debt. What they are overlooking is that as carry trades were entered, the proceeds from shorting the dollar were invested in other assets like equities, gold, and foreign bonds. As traders scramble to sell their Eurozone bond exposure, they use the proceeds from those sales to cover their short dollar positions, thus pushing the dollar higher.
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