Dollar Volatility

Currency markets have been very volatile over the past month. Unfortunately, there has been little direction to accompany it. Thus, wide swings, and many false breakouts with no follow through have been the norm. One of the reasons for the volatility has been that much of the catalysts have been caused by political events. And while market moving economic reports are scheduled and we are aware of when they will be released, political comments come at an inpidual’s whim. We have no idea when they will occur. They can blind side us.

The British Pound is a case in point. The manic/depressive soap opera they call Brext has caused huge swings in the Pound, with little change in price. China and the tariff war are another. Monday morning you wake up and the dollar is sharply lower because, it is said, “trade negotiations with the Chinese are improving”. The next morning you get up to hear that “things aren’t improving as much as thought”, and the dollar is sharply higher. There are other similar political issues that are influencing markets as well. Consequently, volatility has been huge, with little price change actually occurring.

However, this wild non-directional price action continues to suggest that a big move is coming. The problem is I’m not sure in what direction. The dollar index chart below shows the trading range that started in mid-November. Notice the false breakout at A, and the potential one at B. March Dollar Index Daily

Daily March Dollar Index

The upside move out of consolidation on December 14th (A) was a head fake and price quickly returned back into the previous range. With current market conditions I am interest to see if the break below support at B has any follow through.

The rule of thumb is that the longer a trading range lasts, the more powerful it is when price breaks out. In the chart below, you can see that there are four similar consolidation patterns B, C, D, E that led to some pretty decent moves in the dollar since 20016. Weekly Dollar Index

Weekly Dollar Index

Personally I believe the dollar fundamentals are bullish. Yesterdays Fed announcement was mildly bearish as they raised rates ¼ point. Their guidance going forward however, left the impression that there will be two more hikes in 2019, not three. I don’t see that as something that would be a catalyst for a major change in trend. However, the market is what it is.

Another factor I have been contemplating for implications on the dollar is the onset of Quantitative Tightening (QT) by the Fed. Between 2008 and 2015 the Fed pumped 3.1 trillion into the economy by purchasing interest bearing securities. Now they are reversing the process, with the 4th quarter seeing 50 billion in liquidity being taken out of the system. And there is more of the same to come. At the same time no other central bank has even stopped their QE operations. A problem in analyzing the Quantitative cycle is that it has never been tried before. No one is sure what the final outcome will be.

The wild card in all this is the future direction of the economy. How bad is the down turn going to be? From what the stock and bond markets are indicating, it could be a lot more brutal than most believe. A severe economic slump could be a very good reason to be bearish the dollar. Given the fundamental uncertainties I am avoiding my bullish bias, and am planning to simply trade off the technicals.

Paul Kogut is a hardened veteran in analyzing and trading financial markets since 1973. Besides being an expert in the field of market analysis, over the last fifteen years he has also developed a very distinctive and robust writing style on the subject. He has recently published the book “To Be a Trader” (Tate Publishing). It is an in-depth look into the basic tenets of successful trading. These include technical, fundamental, psychological, as well as other related topics. It is full of information and insights that even a seasoned veteran trader would benefit from.

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