US Dollar Index shows signs of weakness
By James Huckle
- Despite the recent jump up in the US Dollar Index (+3.3% YTD), it remains range-bound and weak
- The break down in July of last year set the index on a broadly downward trajectory
- Volatility has begun to expand, decreasing stability, and increasing risk
Signs of weakness
The US Dollar index has been stable, trading around 90-100 for the past six years; however, this relative stability could be in danger.
Our machine-learning model’s forecast has the index falling by 5.6 percent to a level of 87.50 over the next 12 months.
Last July’s break below the prominent upwards sloping trend line from 2012 to 2020 and the fact that price has been unable to recover since has set a bearish tone for the index.
This trend line is now likely to act as ‘resistance’ as traders trapped long will look to cover their positions on any subsequent move higher.
Volatility compression (tight range-bound behavior) eventually gives way to volatility expansion (usually a protracted move in a particular direction). The index has recently broken out of a period of compression and volatility is back on the rise; this favors a continuation of the 12-month momentum, which is currently bearish.
Despite our forecast being negative over 12 months, there is still a fair amount of market ‘chop’ to contend with to get there. A move up to 97.90 is forecast over the next six months, representing a 5.5 percent increase from where we are currently. This is typical of a range-bound market and should be expected.
There has been a lot of talk about the recent strengthening of the dollar (+3.3 percent YTD), but, given that the index moves on average 3.1 percent over a three-month period and the standard deviation of three-month returns is 4 percent, it is far too early to make conclusions about its significance.
~ Huckle is a Quantitative Analyst at Tellimer Research