Dollar To Remain On Strengthening Trajectory
Regular readers will know that we have been bullish the US dollar for some time, as a combination of technical and fundamental factors continue to align. From a technical perspective, the price action on the d ollar Index suggests potential for a resurgence of the g reenback over the coming years on both the monthly and quarterly charts. The monthly chart shows a tentative br eak above trendline resistance , and is combined with positive indications from momentum indicators such as the Relative Strength Index and the Moving Average Convergence Divergence indicator.
However, as we previously mentioned (see Factors Align For Equity Upside And US$ , May 30, 2013), it is important for us to see the break above resistance on the quarterly chart as well to suggest US dollar strength over the coming quarters.
In the 1995-2001 US dollar bull run, it wasn't until about 18 months from the decisive bottom on April 1994, in Q496, before the dollar broke out. Extrapolating from August 2011, when we think the US dollar index bottomed, a similar breakout would have occurred in Q213. The chart pattern looks reasonably similar this time around, and if and when the dollar goes, it will quickly move higher. The bigger picture here is that beyond the speculation about exactly when the Fed will exit QE and hike the funds rate, if the Fed actually raises rates in 2015 (in line with our forecasts), while the ECB, BoJ and BoE remain on hold or even ease further, the dollar is technically positioned to explode higher at some point, as it did in the late 1990s.
|Dollar Bottoming Out|
|DXY Dollar Index - Monthly, With Relative Strength Index|