The dollar rally has been led in hopes of the FED tightening rates in December
of 2016. While most of the other developed nations are still struggling with
low inflation, the U.S.Government provided data that has been largely supportive
of a rate hike.
The sharp rise in the dollar had taken it to extreme levels against
the EURO, as shown in the Bloomberg chart below.The reversal was due, as evidenced
by the RSI, however, the fall has been more vicious and looks like a correction,
rather than a mere pullback.
The seesaw in the U.S. Presidential election polls is affecting the dollar.
"There is some anticipation that the markets have built in a Hillary victory
and that a Trump victory is going to roil the markets," said Paul Nolte,
portfolio manager at Kingsview Asset Management in Chicago, reports Reuters.
However, after recent reports of the FBI reviewing of more emails in its investigations
of Hillary Clinton a few polls are now showing Mr. Donald Trump ahead in the
polls. The markets have started to realize that both the candidates have an
equal opportunity to win.
Will A Trump win quash any hopes of a December rate hike?
Mr.Donald Trump has long been critical of FED Chair Janet Yellen. He has also
spoken against the rates being artificially kept low to benefit Wall
Street.
"It's staying at zero because she's obviously political and she's doing
what Obama wants her to do. And I know that's not supposed to be the way
it is, but that's why it's low," Trump said during an interview with
CNBC back in September, reports USA
News.
Hence, most believe that a Trump win will force the FED to push back their
plans of a rate hike in December of 2016.
"The uncertainty over the election is certainly weighing on the dollar," said
Stephen Casey, senior foreign exchange trader at Cambridge Global Payments
in New York, reports Reuters.
Yellen in support of running a "high pressure" economy.
The FED projected four rate hikes in 2017 after the first rate hike in December
2016. Following the China scare and the Brexit uncertainty in the early part
of this year, the FED developed cold feet and they brought down
the expectations of rate hikes from four to two.
Since then, the members of the Central Bank have been jawboning the
dollar. Though there were three dissenters in the last meeting, the permanent
members are of the opinion that the economy should be given more time.
In a recent speech, Dr. Janet Yellen said she might be open to "temporarily
running a 'high-pressure economy'" to help heal the damages caused due to the
anemic recovery. "High
pressure", implies to allowing inflation to rise above the FED’s target
of 2% to 3%. This can be possible only if Dr. Yellen does not do a rate hike
at all in the near future.
What does the technical picture of the dollar forecast?
The dollar has a history of making double tops, as marked by the circles in
the chart (below). Every major double top formation has led to a slide
in the dollar. Presently, the dollar has again formed a double top, along with
a false breakout. A fake out leads to a sharp fall, as being seen in
the dollar currently.
The ADX reading shows hysteric buying of the dollar, which is coming
to an end. Similarly, the Stochastics are showing a trend change. So, what
do we do to benefit from this fall in the dollar index?
Buy inverse ETF "UDN".
The chart (below) shows that the ETF has been trading in a range since March
of last year. The last two times this ETF had come to the lower end of the
range, it showed a sharp pullback, which carried it towards the highs. Currently,
the ETF is rising from the support levels and a rally to the highs of $22.62
cannot be ruled out in the medium-term.
The current rally will face resistances at the three trendlines as seen on
the chart (below).. There is a trade in UDN for both the short-term and the
medium-term trader!.
The Bottom Line:
I have been warning my readers all throughout the year that the FED will not
employ a rate hike and I have been proven correct, now, I am again going to
forecast a Q.E.5 sometime in 2017. I have been among only a couple analysts
who has gone against the crown and has been proven correct!
The stock markets are at a critical juncture, as is the dollar and gold. The
different markets are not following the traditional rules of trade. The globe
has changed with the ultra-loose monetary policy of the Central Banks. Hence,
a deep understanding of economics and trading is needed to catch the next move
up or down.
