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US Dollar Cracks Long Term Support, But … at Trader’s Narrative





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Last time I wrote about the beleaguered US dollar, it was just kissing its long term support at 80.

It managed to bounce (feebily) making it the sixth time to bounce off that support line. Alas, it seems there won’t be a seventh as the US dollar has managed to fall through to close around 79.

Take a careful look at this chart of the US dollar index:

US dollar 1992 chart

Notice anything? It isn’t the recent chart. It is from 1992. Notice how it resembles our more contemporary US dollar index? The rally at the beginning of the year and then the fall into the summer? the fall through long term support?

Catch Up
Something else we have in common with 1992 is that the short term T-Bill rate had started to fall rapidly - ahead of the Fed funds rate. Then, as now, the Fed found itself in the all too familiar game of catch up and repeatedly lowered rates to match the rates set in the freely traded fixed income market.

So what happened to the dollar? Did it crash through the floor and go to zero? Did all hell break loose? Surely with the dollar so weak and the Fed reducing rates like mad, the currency market must have taken the dollar behind the tool shed.

Well, not quite. Here’s what happened next:
US dollar 1993 chart

Although the similarities are remarkable between now and then, there really is no reason for history to repeat. As Twain quipped, history rhymes, not repeats exactly.

My point is that right now everyone expects the dollar to crash as the Fed lowers rates. But things seldom occur the way everyone believes they should. Popular “logic” has a tendency to be ignored by the market.

And if you recall macroeconomics 101, interest rates are important but there are a few more variables that go into the valuation of currencies. I have no idea whether we’ll see the 1992 rally repeat, but frankly, it wouldn’t surprise me.

Here’s a recent weekly chart for comparison:
us dollar index cracks long term support

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20 Responses to “US Dollar Cracks Long Term Support, But …”  

  1. 1 Bourne

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    Hi. Incidentally, in the P&F from Stockcharts they give a 76 bearish price objective for $USD.

  2. 2 David Merkel

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    Good post. Not sure what will hold up the dollar if the Fed loosens… exports are improving, but not that dramatically.

  3. 3 Must be kidding

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    Weren’t we coming out of a recession in 1992, not on the verge of going into one?

  4. 4 Babak

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    Since recessions are only ID’ed after the fact, who’s to say we aren’t in one right now?

  5. 5 Floyd Upperman

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    It seems like we are in one!

  6. 6 Babak

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    Floyd,
    how about some CoT insight on the USD?

  7. 7 jest

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    Must be kidding is right.

    the dollar rebounded as we were coming out of recession.

    today, the dollar is falling as the economy is slowing down; perhaps flirting with recession. all this while interest rates are starting to come down.

    it’s a totally different situation.

  8. 8 Johan

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    When FED lowers the rate, it usually means that the dollar rallies for the next year or so. This together with the long-term and strong bearish sentiment towards the dollar made me buy dollar heavily yesterday. It might be too early, but this is my long-term stance.

    Good luck to you all (and me)!

  9. 9 Babak

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    Johan, did you do some sort of backtesting for this?

  10. 10 Johan

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    Hi Babak!

    Of course it is backtested. In this case it is from Jason Goepert at SentimenTrader.com and goes back 1971 and 8 instances that the FED lowered the rate. 7 of the 8 time it has gone up. The time it went down was a relatively low 8%.

    But still this is very weak data.

    For instance, more than a year ago I saved this article about what happens when FED stops increasing the rate. And they did stop increase the rate, but what then happened wasn’t really what all these differens statistics said.

    http://bigpicture.typepad.com/comments/2006/08/market_behavior.html

    So the predictions might be wrong again.

    One should be really careful with statistics. 99% of people who deal with stats doesn’t really know what they are doing. But then I’m not a statistician so might stats may be wrong ;-)

  11. 11 Johan

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    One really important concept when using statistics to trade is that you should also have stop losses for your statistics. That is to have certain levels for when you should toss those predictions away.

  12. 12 Bourne

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    Hi, Johan.
    I found this fed-dollar relationship very interesting. I checked with a colleague, but she was skeptic: “until now and since 1971 dollar had preeminence and whenever a crisis began, actives went into dollar as a safe haven currency even if it was low yielding, but now the picture is different…”.
    This was a bit dissapointing as your idea had a counter-intuitive and contrarian potential, but I had to agree that the last TICS data seems to point in that direction. The problem with staticstics usually is sample size. In analyzing markets, often we are using a mix of statistics and exceptional-significative qualitative case studies.

    Who knows. If we are in for a bullish rally in markets and recession fears fail to confirm, maybe the picture is not so different. Good luck anyway.

  13. 13 Capt. Jean-Luc Pikachu

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    If the value of the dollar is based on confidence in America, then only a Democratic president can restore that confidence.

    For more on the premise (and not my partisan conclusion)

  14. 14 Anton

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    Also remember the oil price now vs then.

  15. 15 Salamah

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    I’m in dire need to know the interest rates on the US Dollar between July 1992, and June 1995.
    Can you please tell me where I can find such info?

    Thank you very much.

  16. 16 Babak

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    Salamah, I’d check with the Fed they have all sorts of historical rates, fed funds, libor, euribor, etc.

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