Analyzing currencies is an exercise in relativity. We can say the U.S. dollar is up, but relative to what?
It may be strong compared to the euro, but is it strong when compared to the Brazilian real? (It’s not, by the way.)
With its recent runup to all-time highs versus the dollar, the cryptocurrency bitcoin shows it’s among the strongest areas of the currency market. This raises two questions. First, is this another bubbly run similar to the one seen in 2013 (see Chart 1)? And if it is a bull market, does that have implications that transcend the mere relative strengths among currencies?

Chart 1

The latter question requires an in-depth discussion that goes far beyond the scope of this column.
However, we can use a few other charts to show that something different is brewing. We’ll get to that in a moment.
As for the first question, the current pace of advance does look quite fast, but it still pales in comparison to bitcoin’s runup four years ago. Granted, back then bitcoin was still a novelty in the financial world and a curiosity, if that, among regular investors.
Technical indicators are not of much help because momentum studies are deep into overbought territory now, as they were then. Indeed, when a market melts up, it becomes dangerous for bulls and bears alike. Mistiming a trade by even one day can result in big losses.
And no matter how crazy a rally looks, remember the words of John Maynard Keynes: “The market can stay irrational longer than you can stay solvent.” We cannot know if and when this rally will end.
All we know for sure is that it is a rally, and people are exchanging U.S. dollars for bitcoins in a big way.
While nowhere near the same pace or magnitude, people are also exchanging fiat money for gold.
This is a bit trickier to see because gold is priced in dollars, and since the dollar is strong versus a basket of major currencies – the U.S. dollar index – the chart of gold itself shows a market languishing for several years. All else being equal, a rising dollar hurts the price of gold.
However, if we take the dollar out of the picture and price the metal using the basket of other currencies, we get a very different picture. For simplicity, since the basket is roughly 50% weighted in the euro, a chart of the SPDR Gold Shares Trust exchange-traded fund (ticker: GLD) divided by the CurrencyShares Euro Trust ETF (FXE) gives us a very similar chart (see Chart 2).

Chart 2

What we see is a rally beginning in 2013 and slowly grinding its way back higher after a sharp selloff.
In fact, it has already recaptured two-thirds of what it lost. More-advanced chart watchers will appreciate that the market regained a Fibonacci 61.8% of its losses, and any additional strength would imply a full recovery is likely.
Let’s get back to what this means for paper currencies. Again, it requires a discussion that transcends the charts but it does give us an idea that alternatives to dollars, euros, pounds, and yen are getting some serious interest.
To be sure, betting against the dollar based on the argument that the Federal Reserve’s quantitative-easing and bond-buying activities would cause it to tank and inflation to soar was a losing game since it began. And even as the Fed changes to a strategy of raising short-term interest rates, the bond market still yields close to generational lows. By standard measures, there is no inflation right now.
That just means the market’s economic fears are so far unfounded. But it does not mean we should ignore any signs of economic changes that might appear. Is the new high in bitcoin that sign? Are the gains in dollar-adjusted gold more than just a curiosity? Both should at least lead to a discussion over the emergence of a new macro trend in the currency markets.
And that’s about all I can conclude from price charts. Right now, the U.S. dollar remains in good shape, at least relative to other traditional currencies.

The Mexican Peso Rally

Before closing, let’s take a quick look at the Mexican Peso, since it has been in the news both before and after the presidential election. Last week, the peso rallied sharply to break out from a small technical pattern and continue its rally from January (see Chart 3).

Chart 3

The peso was shellacked after the election, thanks to then-candidate Donald Trump’s statements on the U.S.’s business relationship with Mexico. While its current rally is strong, and the peso has recovered a Fibonacci 61.8% of what it lost, the situation is much different than it is for gold above.
The peso has been in a bear market since at least 2014. That means the postelection selloff happened in the direction of the major trend, and the current rally is still a short-term rally within a long-term bear market. Nothing has yet happened to change the major trend.