Dollar Getting Stronger; How High Can It Go?
The greenback continues to rally vs. the world, showing new strength against the yen and Canadian dollar.
By Michael Kahn
Both are components of the dollar basket. The yen had been heading higher versus the greenback while Canada was trading in line with its southern cousin. Both of those conditions have changed.
Finally, the CurrencyShares Canadian Dollar Trust broke down below the bottom of a triangle pattern in effect since April (see Chart 4). It is a small move, but the trend does appear to be to the downside.
The rally in the U.S. dollar seems to have spread from major European currencies to other important markets around the world. That breadth should give dollar bulls reason to cheer for a few more weeks, if not months, to come.
Like Paris in the fall? For Americans, European travel looks like it’s getting cheaper. For investors, foreign assets may cost less as well.
The U.S. Dollar Index exploded higher after the Brexit vote threw a monkey wrench into the European economy last month. On the charts, however, the dollar index itself did not break out. It took more than three weeks for that to happen, but happen it did. The bull market in the dollar is alive and well.
The index moved above resistance in mid-July, set in part by the extreme high on the day the Brexit result was revealed (see Chart 1). Its next resistance level is not far away at roughly 98.25 (the index traded at 96.54 Wednesday afternoon). If it can get through that level, the path to recapture last year’s highs in the 100.50 area would be fairly clear. For perspective: The index is about where it was one year ago, but has risen sharply from its five-years-ago level of around 75.
Investors can track the dollar’s progress using the PowerShares DB US Dollar Index Bullish exchange-traded fund. The specific resistance levels are slightly different, but the analysis is much the same.
Because the index is comprised of a basket of other currencies and the euro makes up about half its weight, we must also monitor the euro chart itself. The CurrencyShares Euro Trust ETF shows an inverted pattern compared with the dollar index, as expected, but it makes a trendline breakdown — weak euro, strong dollar — clear, as well (see Chart 2).
I highlighted this trend break earlier this month and posited that it was quite possible to see the euro currency fall hard, sending the ETF from its then 110 area to around $106 (it traded at $107.50 Wednesday afternoon). That now seems a bit conservative and lower prices, possibly as low as the bottom of its 18-month range near $103.50, are likely.
The British pound predictably got hammered after the Brexit vote and fell quite sharply over the following days. Rather than bouncing from oversold conditions, the CurrencyShares British Pound Sterling Trust just cranked up the volatility. It still trades at roughly the same low levels it did last month. Perhaps such a dramatic decline requires more time to heal before finding its next trend.
Two more currencies — the Japanese yen and Canadian dollar — seem to confirm dollar strength.
The CurrencyShares Japanese Yen Trust was near major resistance after a very strong 2016 performance (see Chart 3). However, it fell abruptly following the July 10 elections in Japan. Prime Minister Shinzo Abe’s ruling coalition earned a strong result in Japan’s upper house, supposedly green lighting the “Abenomics” pro-growth policy.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.