Technical Analysis Points To U.S. Dollar Upside Potential – Part I
Chris Vermeulen | Aug 17, 2020 01:00AM ET
Article Highlights:
- The US Dollar Presidential Price Cycle indicates rising US Dollar
- The US Dollar is not the best asset, but rather the best of all currencies
- Price Relationships Suggest The US Dollar Is Currently Undervalued
- How The Presidential Price Cycle May Create Opportunities in Precious Metals and the US Stock Market
It’s been a while since we published an article about the US Dollar and this is the perfect time to discuss that is likely to happen over the next 6 to 18+ months. The US Presidential Election is just around the corner and traders/investors are certain to interpret the uncertainty of the US Presidential Election cycle, and the pending policy and liability related changes, as a warning that equities and the US Dollar may be in for a wild ride over the next 6+ months.
h3 UNDERSTANDING GLOBAL CURRENCY “SHININESS”/h3Typically, the US Dollar declines over the 6 to 12+ months prior to a major US Presidential election cycle. Whenever there is a major contest for a new US President or an active and aggressive campaign between two individuals, there is a lot on the line. A US Presidential Election is not just about electing a President – it is about setting US, Foreign, Social, Economic, and Taxation polities well into the future. How businesses and voters interpret the benefits vs. risks usually decides the outcome fairly openly. Yet, global traders vote by deciding how much they believe in the policies and leadership in the new US President and/or how they interpret the risks related to new policies, laws, and regulations.
The US is a major driver of global economic growth throughout the world. The US leads the four other large mature economies by 8.5% to over 20% when compared by global GDP. China is the closest economy to the US, yet it still falls nearly 8.5% behind the US economy annually. Even if we were to combine China, Japan, Germany, and India into one economic block, it would beat the US economy by only 5.5% annually.
This is why, at least for now, unless some other global economy rises to the level to dramatically threaten the US economy, the US Dollar will likely continue to sustain value and dominance throughout the world. It also aligns with my “Shiniest Pile Of Poop” theory. Yea, I know that is a horrible name for a currency valuation theory – but it helps us understand how currencies (and other commodities) are processed in the minds of consumers and traders.
Get The News You Want
A simple example is that of having to dig through the garbage trying to find something to eat (again, a horrible example). Yet, within this example, any human would automatically start ranking the quality of the garbage attempting to determine which items were the “best quality” – even though they are all trash. This process comes naturally for anyone in this position – you simply must select the best items in the pile of trash as potential food items.
How does this relate to currencies? Even though certain currencies may become more attractive from time to time, as traders find value in them and perceive stronger future prices, the reality is that major global currencies will always be considered “shinier” than others. Keep this in mind as we explain our thinking related to the US Dollar going forward.
h3 REPEATING US DOLLAR CYCLES/h3As we can see from the chart below, the US Dollar reacts to US Presidential Election cycles by typically weakening 6 to 12+ months prior to the election date. Each of the last three US Presidential Elections was predicated by a declining US Dollar value and a rise in the US stock market. In 2012, there was virtually no active challenger to Obama’s second term – the expected US Dollar price rotation was rather muted. In 2016, the US experiences once of the most heated and aggressive Presidential campaigns between Hillary Clinton and Donald Trump – the expected US Dollar price rotation was much larger. Currently, as the Presidential Election cycle heats up, we expect a similar range to the 2016~2018 US Dollar price range.
The initial downside selloff in the US Dollar appears to be nearly complete. The second phase of the US Dollar Election cycle should prompt a moderate upside price move in the US Dollar while the US Stock market stalls ahead of the 2020 US Presidential Elections. Our researchers equate this to the uncertainty and potential liabilities of a change in the Office of the US President and the implications related to new policies, taxation, regulation, and other future changes. Traders move into safety within the US Stock market while higher-risk sectors weaken. Essentially, everyone attempts to “place their bets” as to the outcome of the US Presidential Election cycle.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.