1Finance

US Dollar Q1 2017 Forecast - Dollar Draws on Many Sources to Extend 14-Year High



Fundamental Analysis

• "While the US economy is not on a runaway pace, it has nevertheless proven robust over the years while other major economies have wavered. In this environment where appetite for return is so prominent, a competitive economic pace can draw capital as readily as a central bank rate hike – and critically, more consistently. The promise of fiscal stimulus targeting infrastructure could significantly augment the pace of expansion and further draw contrast to those countries that have stagnated. The approval and details of the program remain to be seen, but a degree of speculative anticipation is already priced in."
• "While the promise of a more robust economy is a draw for investment and thereby lever for the currency, it is speculation of interest rate hikes that provides the practical expectation for return. The Federal Open Market Committee (FOMC) hikes rates for the second time in its very nascent hawkish regime on December 14th. That represented a 12-month gap between moves, but the second increase was full expected. Heading into the two-day meeting, the market had fully priced in the hike. The hawkish winds were further lifted by the forecasts for interest rates over the coming three years. In particular, the group increased its expectation for hikes in 2017 from two to three 25 basis point moves. That was the first time in 18 months that the central bank had increased its forecasts."
• "Though it hasn’t evoked this role in some time, it is important to remember that the Dollar is an ultimate safe haven asset. Yet, to truly take advantage of that position, the collapse in sentiment would need to be market-wide and intense. As it happens, a moderate degree of speculative flight would likely hurt the Greenback as it would curb rate expectations. In fact, through the past two years, the correlation between the DXY Dollar Index and VIX has flipped its traditional correlation to an unusual inverse relationship. A steady course for the global financial system and economy would bode well for the Dollar through rate speculation while intense risk aversion could recharge a long-dormant and significantly undervalued theme. In between these extremes though, the currency could very well struggle."

Technical Analysis

• "The DXY rally has now pushed above the 61.8% retracement of the 2001-2008 decline (101.80). From my perspective, the time element of the cycle is most interesting. The rally from March 2008 is now in its 105th month (as of December 2016). There have been 2 longer USD cycles; the 1992-2001 rally lasted 106 months and the end of Bretton Woods to 1978 decline lasted 109 months."
• "Finally, the shape of the rallies from 1992 and 2008 are similar and the wave counts might end up as identical. Proposed wave C now subdivides into 5 waves which indicates high risk of a top. It’s noted too that wave 5 already equals wave 1 (in points…not %) at 103.32. The angle of the rallies on the monthly log chart are defined by the B-2 line. The median lines for both sequences were support for waves 4 of C. After the 2001 top, the median line was support on the first leg down and the break of the ML signaled the onset of the bear."

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