We Told You Didn't We? Dollar Crashes Most Since 2011

We did it. Our public call was once again vindicated by Mr. Market itself. No amount of shenanigans and hot talk rivals being right on a market call, and of course profiting from our correct call. We were right both on direction and timing. It doesn't get much better than this.

We're not boasting, we're merely proving the point that with a well thought out process correctly applied in the financial markets, most systems will almost surely work in the long run. Many traders fail to grasp this because they lack the patience, or worse still, approach this entirely wrongly.

If you've been regularly following our content on social media, you would have caught our cue more than 2 weeks ago on 4th March (see our Facebook post here). We mentioned in our post that we sensed weakness in the dollar index (DXY) despite it trading inside technical support areas and rhetoric on the street calling for the opposite.

 The proof is in the pudding. We correctly called for weakness in the U.S. dollar since 4 March 2016 via our Facebook post. The dollar index has since fallen more than -3.3% (a huge move in the currency market) in less than 3 weeks, making it the sharpest decline since 2011. Technically, price action is at support and we wouldn't be surprised to see a short term bounce. However, sellers are still firmly in control so we will be potential sellers of corrective rallies.  It is fascinating to watch how professional analysts were calling for a resumption of the dollar bull market moments before the sharp waterfall decline in the greenback.   Chart by Business Of Finance

The proof is in the pudding. We correctly called for weakness in the U.S. dollar since 4 March 2016 via our Facebook post. The dollar index has since fallen more than -3.3% (a huge move in the currency market) in less than 3 weeks, making it the sharpest decline since 2011. Technically, price action is at support and we wouldn't be surprised to see a short term bounce. However, sellers are still firmly in control so we will be potential sellers of corrective rallies.

It is fascinating to watch how professional analysts were calling for a resumption of the dollar bull market moments before the sharp waterfall decline in the greenback. 

Chart by Business Of Finance

This isn't the first time we've been proven right by the markets. As all our calls and opinions are fully publicly and available for everyone to view in their entirety, it's easily trackable on how right (or wrong) we have been. We nailed it in October last year, and again in January this year.

To learn more about the reasons on why we were (and are still) bearish the dollar, you are encouraged to thoroughly read through our various journals on our site. No more spoon feeding for babies... We're sure most of you agree on this point!

Technicals

Without revealing too much private insight we reserve for or Premium Subscibers, you should recall that we mentioned how the technicals on the dollar index have changed markedly and that the bullish impulsive trend was at risk of falling apart.

Case in point. As you refer to the chart in the previous section, it is clear that the medium term trend line buffer zone (dynamic support) had been attacked multiple times in short order, with the most recent push lower succeeding in the bears' favor.

Once this dynamic support area was cleared, the bids seemed to vanish almost entirely and price fell in a relatively near linear fashion. This speaks a lot about the hands the big players hold in this market and their willingness to hold on to their positions.

 A strange pattern has emerged whilst trading the dollar so far in 2016. USD tends to exhibit prolonged weakness during domestic U.S. trading hours, and this observation started gain credence after mid-February. During Asian and European trading sessions, the dollar performance has hardly fluctuated more than 2% in ether direction.  Second of all, we note that absolutely financial conditions in the U.S. financial system have eased considerably (according to data from GS), while those in Europe hav atrophied mainly the victims of a strong euro and wider credit spreads.  Charts courtesy of BofAML, Goldman Sachs

A strange pattern has emerged whilst trading the dollar so far in 2016. USD tends to exhibit prolonged weakness during domestic U.S. trading hours, and this observation started gain credence after mid-February. During Asian and European trading sessions, the dollar performance has hardly fluctuated more than 2% in ether direction.

Second of all, we note that absolutely financial conditions in the U.S. financial system have eased considerably (according to data from GS), while those in Europe hav atrophied mainly the victims of a strong euro and wider credit spreads.

Charts courtesy of BofAML, Goldman Sachs

Looking slightly farther back, notice how price actually staged a clean breakout pullback sell setup earlier in February, offering traders a high probability trade with an extremely superior risk-to-reward profile.

So just on a technical basis, there is a strong basis to be short biased the dollar. We expect the downtrend to persist, although price action may start to get volatile as we are approaching some key support zones.

Selling into weak pullbacks appeals to us, traders that already have a short exposure on the greenback can look to add to their positions while those that don't should thread wisely with more caution.

A dovishly hawkish Fed

Unless you've been sleeping under a rock for the past week, you would have known about the latest March FOMC event last Wednesday which saw no change in the Fed Funds target rate, but provided revised economic and data projections, and of course Chair Yellen's press conference, all of which brought slightly more clarity for market participants.

  "The main beneficiary post-FOMC non event? Gold. Greenback is weaker, risk is slightly higher, and so are bonds. Oil closing today up 5%+..."   Business Of Finance on Facebook, 17 March 2016

"The main beneficiary post-FOMC non event? Gold. Greenback is weaker, risk is slightly higher, and so are bonds. Oil closing today up 5%+..."

Business Of Finance on Facebook, 17 March 2016

Without going into the minutiae, there are a few key takeaways we which to highlight to our readers. All in all, we like to term last week's FOMC event as dovishly-hawkish. Markets were generally expecting a Fed that leaned more towards the hawkish side. Disappointment on this front explained the market's readiness to sell dollars in exchange for (what we call) other "more discounted" currencies such as the euro and yen.

A lot from December's meeting was brought forward to last week's statement. There was the same mention of market-based inflation expectations remaining subdued, persistent deflationary pressures due to low oil prices, and the Fed's resolve to bring inflation up to their long term mandated target (even though the core measure has already surpassed Yellen's target). External factors was another persistent mention, which means the balls are now in the courts of other central banks.

  "Fed leaves rates unchanged at 0.25% - 0.5% as expected. Here are some of the headlines:     FED MEDIAN FORECAST IMPLIES TWO 2016 RATE HIKES VS FOUR IN DEC    FED SAYS GLOBAL ECONOMIC DEVELOPMENTS CONTINUE TO POSE RISKS    FED LEAVES RATES UNCHANGED AT 0.25%-0.5% AS EXPECTED    FED: GEORGE DISSENTED IN FAVOR OF A RATE. RISE TO 0.5%-0.75%    FED: MKT-BASED INFLATION COMPENSATION MEASURES REMAIN LOW    FED SAYS RANGE OF DATA SHOW MORE STRENGTH IN LABOR MARKET    FED: ECONOMY EXPECTED TO WARRANT ONLY GRADUAL RATE INCREASES    FED FORECASTS SHOW SHALLOWER PACE OF RATE RISES IN 2017, 2018    FED: ECONOMIC ACTIVITY MODERATE DESPITE GLOBAL DEVELOPMENTS"    Business Of Finance on Facebook, 17 March 2016

"Fed leaves rates unchanged at 0.25% - 0.5% as expected. Here are some of the headlines:

  • FED MEDIAN FORECAST IMPLIES TWO 2016 RATE HIKES VS FOUR IN DEC
  • FED SAYS GLOBAL ECONOMIC DEVELOPMENTS CONTINUE TO POSE RISKS
  • FED LEAVES RATES UNCHANGED AT 0.25%-0.5% AS EXPECTED
  • FED: GEORGE DISSENTED IN FAVOR OF A RATE. RISE TO 0.5%-0.75%
  • FED: MKT-BASED INFLATION COMPENSATION MEASURES REMAIN LOW
  • FED SAYS RANGE OF DATA SHOW MORE STRENGTH IN LABOR MARKET
  • FED: ECONOMY EXPECTED TO WARRANT ONLY GRADUAL RATE INCREASES
  • FED FORECASTS SHOW SHALLOWER PACE OF RATE RISES IN 2017, 2018
  • FED: ECONOMIC ACTIVITY MODERATE DESPITE GLOBAL DEVELOPMENTS"

Business Of Finance on Facebook, 17 March 2016

While there were other points, one clearly stood out. Chiefly, the Fed's dot plot (FOMC members' forecast of where FF rates would be down the line) implied only 2 additional rate hikes in 2016, as opposed to 4 hikes in December. Markets had not discounted for this, and by markets we mean the dollar.

This development sent dollar bulls running for the hills, treasury yields crashed their most since late 2015, and gold exploded higher on the day itself. With markets reacting so strongly to this revised dot plot, it tells us that there might be more discounting left to do.

While the dollar may not have fully discounted for this risk, other markets such as the Eurodollar and FF futures have been pricing in a dovishly-hawkish Fed for quite some time now. We've been documenting this on our Facebook page.

We're sticking to our view of a dovishly-hawkish Fed in the near term. Watch oil prices as they will start to weigh more on the Fed's decisions going forward.

And yes, we're still bearish the dollar.