The case for selling the US dollar
What are the US dollar bears seeing?
Since early August, the US dollar has been like Michael Phelps at the 2008 Beijing Olympics.
Not only is the dollar trouncing the field but it’s extending the lead on every lap. Since August 8, the US dollar has gained 3.7% to 10.15% against all its major rivals.
Performance vs USD since August 8
Technical analysis
The main technical argument against the US dollar is that it’s gone too far, too fast.
A simple indicator like the daily RSI is at 79 in USD/JPY and that could be a sing of a short-term pullback but that’s the case for all the yen crosses.
A longer-term warning sign is the weekly RSI and it’s at or near the most overbought in years in some cases. EUR/USD is at 27, cable is at 31, USD/JPY at 76 and the Dollar Index at 75.
The largest red flag might be the monthly RSI in USD/JPY — it’s at the highest in at least 40 years at 78.6.
USDJPY most overbought monthly RSI ever
US dollar fundamentals
I think the technical argument is sketchy because markets are always oversold/overbought when something changes and they can remain that way for a period.
But in the US what has really changed?
- The Fed has ended QE but that’s been telegraphed since the start of the year.
- The Fed balance sheet isn’t shrinking
- The US inflation is arguably lower than it was a few months ago
- The drop in oil prices is good for trade but it could be crippling for shale investment
- Economic data is better but not spectacularly
What the dollar rally really speaks to is the lack of alternatives. Japan is a no-go zone because of fresh QE and the ECB may be on the same track. The commodity bloc is hurting because commodities are falling.
That kind of story is good for a dollar climb but until the US economy shows some real signs of heating up (with inflation) it’s not the kind of thing a multi-year bull market is built on.
