This article was published on Business Times’ column “ChartPoint” on 4 September 2017.
DXY Monthly chart Blue line = 60 moving average Source: Bloomberg, PSR
The Dollar Index (DXY) has been stuck on a decline since the start of the year falling from a high of $103.80 to the current low of $91.62, representing a drop of 11% over the past eight months. The DXY is an index of the United States dollar relative to a basket of foreign currencies, mainly against the Euro, Japanese Yen, Pound Sterling and Canadian Dollar. From a cyclical point of view, the DXY follows a long term cycle of 98 months where a cyclical top takes over in between every 98 months, turning the DXY into a prolonged downtrend. With the convincing bearish price action since the start of the year, we can almost ascertain that a long term top is in place.
The January 2017 high of $103.82 should be the top for the current cycle implying the DXY has transited into a long term downtrend since January 2017. In other words, the current cycle took 94 months to complete while the previous two cycles took 89 months and 92 months to finalise.
As the DXY fell consecutively for the past six months, the selloff has taken the DXY to a critical area where a great deal of support can be found off the confluence of $92.00 psychological support area, 60 week moving average and 38.2% Fibonacci retracement level. The $92.00 area used to act as a resistance back in May 2004 and November 2005 but buyers eventually broke the $92.00 resistance area in 2015, and since then, the $92.00 area continued to be an important area as it supported price more recently in May 2016.
To gauge the strength of the selloff, looking at the weekly relative strength index (RSI) suggests an oversold condition and an imminent near term correction is over the horizon. The RSI hit a recent extreme low of 27 in the week ended 25 August 2017.
Hence, we believe the current sell-off is overdone, and the strong support at $92.00 area makes this a highly possible area for the DXY to make a rebound. Some minor signs of recovery are showing up on the daily timeframe with buyers rejecting the $92.00 support area on 29 August, resulting in the formation of a hammer. If the hammer stays in play, the current bullish recovery could take the DXY back to test the $94.00 – $94.60 resistance area.
Keep in mind our view for the bullish correction is only a near term outlook and the newly formed secular downtrend since January 2017 still controls the long term view. Our study has shown that once the cyclical peak is formed, the secular downtrend that takes over tends to retest the prior decade’s low. If history is any indication, the target for the current secular downtrend points to the $80.00 support area minimally and in the worst case scenario, the $73.00 support area from 2011.
Since the EUR and Yen have the highest weighting in the DXY, with EUR representing 57.6% and Yen representing 13.6%, the price action of EURUSD and USDJPY should provide more clue regarding the market movement. More importantly, these are the key levels to watch for the near term recovery for DXY to play out: EURUSD: $1.2000 resistance, USDJPY: $108.30 support
As long as these levels hold, the near term rebound in DXY should happen. In short, the near-term outlook on DXY is bullish with limited upside as the secular downtrend since January 2017 will continue to weigh down on price.