Understanding the Dollar’s mega cycle potential

Many pundits and forecasters out there believe the dollar to be overvalued right now. Well,

certainly by the most recent matrix there is an argument to support that view. However, if

one steps back in time and looks at where the dollar is relative to where it has been over the

past 30 years then that perceived ‘overvaluation’ argument would seem to hold less water.

Now of course within that general overvaluation assessment there are considerable

contrasts versus many currencies, which in some cases are quite marked. For example, the

US currency is strong versus the EM and and the GBP right now, but certainly not so versus

the CHF and the JPY.

So, for the purposes of this article I am going to focus on the USD index; whilst not a perfect

benchmark: is nevertheless a good barometer by which to gauge the relative strength or

weakness of the dollar as it is based on a basket of other currencies.

In 1985 the worlds leading central banks (Just the G7 back then) got together to force down

the value of the dollar as they felt it was dangerously overvalued, particularly versus the

Deutschemark and the Japanese Yen.

This action to lower the dollar was known as the ‘Plaza Accord’. Prior to this first ‘co-

ordinated’ central bank intervention the USD index had been trading above 160. Following

their intervention, and over the next 2-3 decades the USD index more than halved in value,

eventually falling back to a low of 70.69 in 2008.

Perhaps interesting that this low point in the dollar, of the past 50years, coincided with the

onset of the financial crisis- a crisis we are led to believe is now well and truly behind us.

Since then, over the past decade, the dollar has been on the rise again, pushing back above

103 by the middle of last year. The upside run from above that low, which effectively

started at 72.69, rose to a 2017 high of 103.82. It also unfolded in a very definable 5-wave

price pattern. This is known as an Elliot wave sequence.

I know it was very definable because I not only tracked it closely over the whole period, but

also traded around the various waves from a selectively long dollar stance as and when it

was appropriate.

However, the failure of the 5 th and final upside wave to really accelerate to anything like its

potential (stalled at 103.82) is what gave rise to the sell off at the beginning of 2018- a sell

off that saw the USD index fall back to as low as 88.25 in the first quarter of this year. That

low reached an absolutely perfect 50% retracement of the whole move, from its 2011 low at

72.69 to its 2017 high of 103.82.

To better illustrate that please take a look at the chart below which clearly shows that

whole move and where you can see just how the sell off in the dollar totally nailed that 50%

retracement level- the blue parallel line.

As you can see the latest rebound from that 88.25 level has so far made it to just shy of

97.00 (96.98 to be exact)- a level reached on the 15 th August and very nearly matched again

last week when the USD index rose to a high of 96.86 before backing off into the close on


So what does all this tell us? Well, If the move from 72.69 to 103.82 was the first wave in a

potentially longer term 5-wave mega upside cycle in the dollar, then the relapse to 88.25

could have been the second- a corrective move.

If that’s the case, then all the time price remains above that Q1 2018 low at 88.25, the

potential for the current 3 rd wave to move considerably higher is most definitely live. If

indeed that is so, then we should be talking about a wave that could lead us eventually

through 103.82 and up towards 119.38.

Now, a lot of people won’t agree with that prognosis I’m sure and certainly not those

looking for a cyclical quarterly relapse in the dollar by the end of this year. Irrespective of

that, and even if a short term relapse does unfold, it probably wont change the longer term

dynamics provided we don’t get a move back below that 88.25 level. I will of course be

watching all this very closely in the weeks ahead and keep you posted if anything of

fundamental significance does emerge to potentially derail the cycle.

Key data events due this week.

29/10- 12.00pm onwards-UK Autumn statement and Budget

30/10- 10.00am- Eurozone final Q3 GDP revision

31/10- 12.00am (Approx) BOJ Policy decision

31/10- 10.00am Eurozone October CPI report

01/11- 12.00pm UK BOE policy Decision and 12.30pm Quarterly inflation report.

02/11- 12.30pm US October Unemployment report