Is The US Dollar Going to Crash? The 43-Year Trend That is Paving The Way for an Almighty Collapse
For the last several weeks, the background noise of the coronavirus has been dominating commentary on all the markets: the dollar, gold, interest rates, and the stock market. And with all the emotion, panic and chaos we’ve been hearing, it's incumbent upon us to be entirely objective.
Let’s start with interest rates, because you’ve probably been hearing a lot about them.
Last week the US Federal Reserve lowers lowered interest rates by 50 basis points. In response, the 10-year Treasury bond yield went under the 1% threshold for the first time in its history. It didn't stay there very long, but the precedent was set.
This was not surprise if you’ve been looking at the long-term price history of interest rates.
And it backs up the key point I try to make every week in my Reports: the news is always a catalyst for what markets were already doing. In fact, there's probably no better example than this chart of a global phenomenon:
For the past few years, we’ve seen a concerted race to the bottom with interest rates. Each central banker in each country has been lowering rates as far and as fast as they can. Many rates in Germany and France are now negative. We have negative rates in Japan and nearly zero rates in Australia and New Zealand too. So this has been an ongoing, escalating trend.
Now of course the local news is offering the virus as the reason why the U.S. Federal Reserve acted as it did.
But it's my contention that the Fed would have done so anyway at some point in the future. The coronavirus is simply accelerating what was already happening.
Note that the chart above shows the trajectory of interest rates over 5,000 years! It certainly puts everything in perspective, including the spike at the end of the 1970s instigated by Paul Volcker to fight stagflation.
The key point here is that since 1979, rates have been dropping. This has been the trend for the last several decades. So what happened last week was just a continuation of what was already going on.
In fact, price tells you where markets are headed before the events surface. And events tend propel markets in the direction they were already going. This is a very important point to keep in mind, especially when we look at a few more long-term charts this week.
Here’s the 43 year history of the U.S. Dollar Index (USDI), which measures the U.S. dollar measure against half a dozen major currency pairs.
You can see that despite the fact USDI has run up for the last 10 years, it’s still well below historical peaks.
What’s more, USDI is tracing out what looks like a descending triangle where each bounce off the common low is lower than the last bounce. There might still be some room to run on the upside, but USDI is at a historic resistance level. (When we look back on this one day, it wouldn't be surprising to see this as a major turning point in the U.S. dollar.)
In the meantime, I’m unsure whether we're going to have one more run up to that sloping trendline or if we're going to collapse from the double top. However, it's starting to look like the latter is more likely.
Another key point: once dollar trends take hold, they keep going for many years: 5, 8 even 10 years.
Obviously this is a smoothed out curve, but we can surmise that if the dollar starts turning here then USDI could have a 5, 8 or even 10 year run to the downside. So keep that in mind if you think you're a little late to the party when it comes to shorting the dollar.
For now, resistance continues building at the same level where in 2016 – 2017 USDI had a double top. It looks like there’s another double top emerging right now. The chart below shows a more zoomed-in version of the 43 year U.S. dollar chart:
Note that we’re in a chaotic market environment where prices are apt to reverse violently.
So while I’m not saying a USDI crash is imminent, it certainly looks like the U.S. dollar is about to turn and crash based on 43 years of history.
And if we really are on the cusp of such a crash, I know exactly how to play it for best effect.
The one currency pair that should get crushed the most is USDJPY (the U.S. dollar versus the Japanese yen).
I'm not saying that just because USDJPY has had a 700 pip decline in the last couple of weeks. If you've known me for any length of time, you'll know this was no surprise to me. I’ve been calling for (and profiting from) repeated decline in USDJPY for many years now.
It wasn't inside information that gave me this inkling. All along, it’s been about the governing patterns going back almost five years ago that gave me what was effectively a “cheat sheet” as to where this pair was likely to go.
The governing pattern in USDJPY is the double top in 2015 after the market climbed from 75 (off the left edge of this chart) to about 126. Once USDJPY completed the double top, the upside was over.
Nothing in the past several years has dissuaded me from that notion. The more recent descending triangle (lower highs with a common low) has just reinforced the overall bearishness of USDJPY. That’s why when we see emotional events like the coronavirus, they’re really just the catalysts for the underlying trend.
Even though the virus is an outlier, it's just pushing this market in the direction it was already headed.
That includes the bull trap we saw a few weeks ago where the price rose outside the triangle. It was just a trap for those who were duped into thinking USDJPY was going the other way.
More importantly, USDJPY remains bearish. So in this market uncertainty where everything’s volatile and you don't know what’s happening next, one very safe haven is staying short USDJPY.
I would use any opportunity to get short here, including any bounces that may appear as this pair heads lower and lower over time.
I have another pair where I’m very enthusiastically long, but first let’s take a look at a couple of other prospects in the FX markets.
In this chart I'm looking at EURUSD (the Euro versus the U.S. dollar).
EURUSD made a huge bounce right at historical trading levels. However, I'm not ready to go long this pair just yet despite that 43 year history of USDI.
That’s because the dollar may have one more run to the upside. That would make the current EURUSD rally a sucker’s rally before the real one.
What would really solidify this apparent EURUSD trend change is a move above the 1.15 – 1.16 level. If the market can break through that historic resistance, that would probably confirm the EURUSD bottom is in.
That’s why I want to give this pair bit more time to see if the dollar turn is real or if we’re going to get one more turn back into the chop instead.
The Euro is looking strong against the British pound too as we see with EURGBP:
The governing price pattern here is the huge double bottom that was carved out 5 years ago.
A new, smaller double bottom has just been formed and this should act as a platform to drive EURGBP higher once again.
I would look at any pullback as an opportunity to go long because I think over time this pair will go higher. Whether that progress is slow or fast remains to be seen, but the direction looks clear at this point.
Now for another of my long-time FX favorites …
One pair I've not been shy about hiding my affinity for is GBPNZD (the British pound versus New Zealand dollar). I've been shouting about this pair since late 2016 after it defined the double bottom governing price pattern.
So just like we saw in EURGBP, we can refer back to a pattern that tells us where this pair was always headed.
And notwithstanding the topsy turvy price action over the last four years, GBPNZD has risen about 4000 pips following theatdouble bottom.
Last week there was a key reversal where GBPNZD made a new low and then closed toward the high. There’s no breakout yet, but the longer this pair consolidates at these high areas it's building a bigger head of steam for a major move.
To my mind, GBPNZD looks like a spring-loaded coil that will eventually unleash its energy to the upside once again. The future trajectory of this looks much higher over time.
Now let’s look at some commodity markets, the most important one being oil.
I’ve been a consistent oil bear for a very long time based on price history that you can't see in this timeframe. I remember looking at a monthly chart five years ago and saying that I thought oil would go back to $20 based on long-term price patterns. I still maintain that view despite all the “bullish” news when Iran bombed the Yemen oilfields, the U.S. / China tariff wars and similar events that helped push oil higher. To me these were nothing more than bounces in a long-term bear market.
I still can't see anything but lower oil prices from here. Aside from the long-term downtrend from $110 to $40 over the last five or six years, the market has been capped with first one and then a second double top.
Of course, a lot of the recent price action will be blamed on the coronavirus. But the coronavirus was not even in the picture five years ago and yet here we are with oil.
The latest price development is very bearish: oil cracked the neckline of its most recent double top. Oil should now challenge and possibly go way under the 2016 low of $25.
Oil’s collapse is accelerating and I don't think there's anything to stop this market from dropping hard in the near future.
Now I want to talk about the precious metals markets, starting with XAGUSD (spot silver).
Notwithstanding all the background noise of an economic collapse, record low interest rates, coronavirus, a slowdown in the economy, and so on, you can see that silver is still in a bear market or (at best) a sideways market. Now markets do change and there are several patterns that could or should be a catalyst for a lift.
But silver is still having a hard time getting past its previous highs and to my mind if this is a bull market, it needs to prove it. Silver needs to start making higher highs and take out first the September highs around $19.60 and subsequently the longer term high at $21.15.
One sign of encouragement is a bullish key reversal last week. These key reversals sometimes do indicate the direction they're pointing. But I wouldn’t swing at this pitch yet.
To put the recent rise of gold into perspective, I thought I'd show you this hundred year chart of the gold chart.
You can see that we're within spitting distance of a hundred year resistance level.
There a couple of key points to note here. First, gold is about $300 shy of that resistance level. So there's still quite a bit of room to move before the yellow metal hits this resistance. The next point is that I would expect a great deal of turbulence around the $2,000 level when gold finally hits it.
That’s because when a market heads toward significant resistance levels, it typically tends to churn sideways for awhile to build the energy needed to break through to new highs.
A weekly chart of spot gold shows how this works in the shorter term too. Looking at this gold chart objectively we can see it’s obviously in an ascension mode (unlike silver).
It started with an underlying governing pattern of a double bottom all the way back in 2015 which proved itself to be part of a complex inverted head and shoulders pattern. (That’s where there are multiple shoulders on each side of the double bottom.)
Gold finally broke out of this bottoming pattern at $1,380 and the yellow metal should continue higher with some pauses along the way.
However, I’ve been a bit reticent to chase this gold rally despite a couple of profitable trades along the way. I and my members went long at $1,479 (where gold broke out of its pennant formation) until we got out at $1,607. More recently we went short at $1,635 and got out at $1,579.
But right now I don’t see a good risk reward opportunity because of two main reasons. There’s now huge volatility in gold: in the past week there was a $150 range.
There’s also the bearish divergence with silver not correlating.
When volatility starts expanding, the risk tends to get too large for my tastes. That means I might miss a huge piece of the next move. But it also means I avoid getting caught by a vicious move the wrong way too.
That’s why I'm still on the sidelines. I want a better risk reward opportunity before I pile into the gold market one way or the other. Controlling market risk is everything right now!
Before I wrap up this week’s report, let’s take a look at the U.S. stock market – specifically the S&P 500.
It’s no secret that price behavior has changed dramatically. In fact, there’s no instance over the last decade with price behavior like we've seen in the last couple of weeks. In just two weeks, the S&P500 has taken out 13 months’ worth of a huge bull market.
Typically everybody has bought the U.S. stock market since 1987. Every pullback has proved to be a great buying opportunity.
Now this may be another opportunity, but it comes down to the trend line I’ve drawn and the key reversals along the way. This has been a bull market backed by key reversals after each drop. These reversals offer identifiers for buying opportunities.
But we haven’t seen such a reversal in this drop yet. And we may have some way to go before we do. That’s because this market could drop to the 2,600 level and still not break the bullish trend.
What would end the bull? Any major encroachment underneath the trendline would shake the whole foundation of this bull market.
In the meantime, there’s a huge inside week in the S&P500. And anything can happen with the volatility this huge. We could have days where it goes up 1,300 points and then the following day it's down 900 points or anything in between.
With volatility this high, your risk is so much higher.
During times like this, it makes a whole lot of sense to create a safe haven for my portfolio and establish positions in pairs where I think I understand where they're going to go.
Yes, I may be missing some opportunities here and there. But with all the volatility I like to stick with things I know and where I don’t have to worry about those positions every minute of the day.
That’s why I'm hanging out in those FX pairs that I feel comfortable with while waiting for opportunities based on price action. Remember, price action is paramount. All the news and events we see in the media are just catalysts to propel those markets in the direction they were already headed.
So in the meantime, I’m very comfortable being long GBPNZD and short USDJPY.
I wish you a very healthy and prosperous trading week.
Mark "HistoricOpportunities" Shawzin