“Dollar smashes through resistance as mega-rally gathers pace”, claims the title of an article on telegraph.co.uk. The dollar may be in a longer-term uptrend but its trade-weighted index is testing rather than already through important resistance, while relative economic prospects may be shifting less favourably for the US.

The first chart shows the Bank of England’s trade-weighted dollar index together with the net long position of US “non-commercial” futures market participants in dollar contracts against six other developed market currencies. Three features are noteworthy.

First, the dollar index has reversed nearly 38.2% of its entire decline between 2002 and 2011. 38.2% is an important “Fibonacci” retracement level and often acts as resistance; some technicians, indeed, argue that a change of trend is confirmed only when it is broken. Such confirmation has yet to occur: the 38.2% retracement level of 94.41 compares with a current rally high of 93.94 (on Monday)*. Note also that the Fibonacci level coincides approximately with the 2009 high of 95.08. The 94-95 area, therefore, represents a significant technical barrier.


Secondly, the rise in the dollar index from its 2011 low has occurred in five waves – three sustained upswings separated by two corrective phases. According to Elliott Wave theory, this pattern suggests a completing move that will be followed by a more significant correction than the prior two set-backs.

Thirdly, the futures market net long position is at the top of its historical range. The position reached similar extremes at the end of the prior two upswings since 2011. It was similar in magnitude but opposite in sign at the 2011 low. Futures market participants, at least, appear already to have bought in fully to the “mega-rally” story.

Technical considerations, of course, can be blown away by “fundamentals”. The consensus view is that US economic health and rising wage pressures will ensure Fed tightening in 2015, while the ECB and even the Bank of Japan will be forced to ease further in response to limp growth and deflation risks. Monetary trends, however, question this scenario: six-month growth of real narrow money is solid and rising in the Eurozone and is recovering in Japan but has fallen in the US since mid-2014 – second chart**. US economic growth may disappoint (again) in 2015 while the Eurozone / Japan could outperform current low expectations.


 
*Any break needs to be sustained for several days to be considered valid.
**The chart includes October estimates for the US and Japan.