There have been many occasions over the last few years where the great and good have called the end of the dollar as the world’s major currency. Indeed, this last week has seen market professionals calling the end of the third great rally since the Nixon shock in the very early 1970s.
Before Tuesday’s major market reversal, the greenback was set to post its longest losing streak in over 14 years. August was set to be its sixth consecutive monthly fall with the DXY down over 9% this year. Of course we must remind ourselves that the euro has a 57% weighting in DXY and Tuesday’s EUR/USD made multi-month highs with the single currency reaching a high of 1.2070.
This comes on the back of the Jackson Hole symposium, which severely disappointed traders who were expecting signals on balance-sheet adjustment and rate-hike timings from Janet Yellen and Mario Draghi. As Draghi failed to give any reassurance that the ECB will move extremely slowly to trigger a meaningful correction of EUR/USD, his silence prompted a wave of EUR buying, pushing DXY to lows not seen in 16 months.
In the wider picture, the Trump trade has come and gone with the lofty levels of 103 seen at the start of the year now a distant memory. As politics, geopolitics and scandals have hit the buck, so other global economies have shown decent signs of growth and the chase for yield has gone overseas. A Fed perceived as dovish versus even a soft-tapering ECB has kicked the dollar some more.
And yet amid the gloom, ‘Turnaround Tuesday’ really did prove its worth for any dollar bulls left out there. With 10-year bonds bottoming around 2.08%, fed-fund futures implying a 33% chance of a December hike from a risk-off low of 25%, so DXY bounced off its lows.
What is highly interesting for us is the low of 91.62 and the retracement of this move thatformed a major reversal pattern. A ‘pin-bar’ formation is a classic price-action signal, which shows a decisive rejection of lower prices. The level of support around the May 2016 spike low also offers comfort for bottom pickers, while prices holding above the August 2015 lows should be seen as key.
Of course, we have a long way to go to halt the aggressive march lower this year in DXY. Back to August 11 lows of 92.93 would retrace last Friday’s sell-off so Thursday’s US and Euro inflation data Thursday and Friday’s US employment figures will determine short-term price action. With debt-ceiling struggles and next week’s ECB meeting also looming large, it will be fascinating to see if any slightly positive news is seen as a fillip for the dollar, having been in the doldrums so much this year.