To me, avalanches have always been one of the most dramatic and terrifying of natural disasters. In general, avalanches tend to occur after a seemingly small disturbance, such as new precipitation, animal movements (including humans) or a large rock dislodging, but there are usually advance warning signs that an avalanche is more likely to occur.
The same can be said of “avalanches” of buy or sell orders in financial markets. In the case of the current bullish-USD avalanche, the warning signs came from diverging monetary policy in a low-yielding world and continued deflation in the Eurozone, one of the US’s biggest economic rivals. A singular disturbance is difficult to pinpoint in this case, but the combination of continued dovish rhetoric from the ECB and Friday’s strong NFP report raising the probability of a June rate hike by the Federal Reserve. The most powerful avalanches can reach speeds of over 300km per hour, and the pace of dollar buying this week now doubt reached the trading equivalent of that, but the most important question on traders’ minds is, “Will the dollar buying continue from here?”
In the short-term, we’re inclined to go with the flow. From a fundamental perspective, much of the current strength stems from the likelihood that the Federal Reserve will remove its patient pledge from the FOMC statement next week, and there is still plenty of time for the current bullish frenzy to draw in more traders. That said, dollar bulls may be getting ahead of themselves on a more medium-term basis; after all, the Fed is almost certainly on hold until June at the earliest, and the recent bout of dollar strength may due much of the central bank’s heavy lifting for it by decreasing the cost imports and raising the price of US exports.
Technical View: Dollar Index
We’ve been checking in on the Dollar Index fairly regularly of late (see here and here for two recent examples) because it provides an at-a-glance overview of the greenback’s performance against its major developed world rivals. So far today, the dollar index came within 0.01 points of the psychologically-significant 100 level, which as we noted when discussing USDCHF yesterday, is close enough the century level for government work (note that the below chart does not yet show today’s strong bullish candle.
The index is now deeply overbought, with a daily RSI reading above 80, but that’s not necessarily a sign of an imminent pullback, as we saw a similarly overbought reading endure for nearly a month last September. Meanwhile, the MACD indicator is trending higher above both its signal line and the “0” level, showing strong and growing bullish momentum. If these two indicators start to roll over, a short-term pullback toward the previous breakout level at 96.00 is possible, but in the immediate term, the preponderance of technical and fundamental evidence is pointing to more strength in the buck.
After all, it’s pointless to try to climb a mountain against the strength of an ongoing avalanche.