The US Dollar and the Future of the Asset Markets
Updated
In this analysis, I'll take a look at the US Dollar Index (DXY), analyze it from both a technical and fundamental aspect, and look at what this could imply for the asset markets this year.
DXY Technical Analysis
- To begin with, we can take a look at the monthly chart for the dollar index
- Since 2001, it has been on a downtrend, and ever since 2008, it has been trading within an ascending parallel channel, creating higher lows and higher highs
- We are currently testing the bottom of the channel support, which aligns with the 0.382 fibonacci retracement level
- Should we see a technical bounce, we could expect huge resistance at 101.7
- If the structure breaks down without a dead cat bounce, we could expect some support at 82.5
DXY Fundamental Analysis
- Despite potentially bullish signs from a technical perspective, all fundamental aspects suggest otherwise:
- Due to the Covid Pandemic, we have seen quantitative easing take place at an unprecedented rate
- Biden proposed a
11T spending plan. Regardless of whether he can enact it, this is certainly bad news for the dollar
- Talks of a $2,000 stimulus is taking place, and it's very likely that it could pass
- When the Fedd raises rates, the USD rallies strongly against assets.
- However, it was said that the Fed would keep the near-zero rates at least until 2023.
So what does this imply for the asset markets? How can we capitalize on this opportunity?
- The chart above demonstrates the following: US Dollar Index (DXY), Nasdaq Composite Index (IXIC), Bitcoin (BTC), and M2 Money Stock (M2)
- We can see the clear change in trend after the Covid shock in March
- The Covid outbreak began around late November in China, but it was only in March that the global financial markets were hit
- Ever since March 2020, M2 has grown at an exponential rate, and with this, the dollar has fallen dramatically while asset and security prices have risen significantly
- As fundamental factors may drive the DXY further downwards, it's reasonable to expect asset/securities prices to rally upwards.
- As such, it's important to understand that the returns you made in 2020, and will make in 2021, is a byproduct of strange macroeconomic situations, in which your cash is becoming trash.
- It may seem like you're earning money, but in reality, most of it is asset/security prices being inflated.
Does this mean we are in a bubble?
No one can predict the future, but in my humble opinion, it's hard to confirm that this is indeed a bubble.
To understand my perspective in depth, check out my previous analysis below:
For us to not undergo another bubble that'll be written down in history, it's important that we see the real economy catch up with the rather hyped-up financial markets. Of course, we'd have to see the majority of the world's population get vaccinated, and have the Covid pandemic settled to an extent, where people can have their normal lives back.
It's important that capital be invested into medium-small businesses, which serve as real jobmakers, and have individuals consume goods and services, rather than save their money, or invest in financial markets.
Conclusion
In conclusion, it's important that retail investors and traders focus on improving their sharpe ratio this year. We may, or may not be in the middle of a bubble. Only time will tell. What we can do, is meticulously manage risk, and focus on maximizing returns while reducing the chances of losing it all, in case this market does turn out to be a bubble.
If you like this educational post, please make sure to like, and follow for more quality content!
If you have any questions or comments, feel free to comment below! :)
DXY Technical Analysis
- To begin with, we can take a look at the monthly chart for the dollar index
- Since 2001, it has been on a downtrend, and ever since 2008, it has been trading within an ascending parallel channel, creating higher lows and higher highs
- We are currently testing the bottom of the channel support, which aligns with the 0.382 fibonacci retracement level
- Should we see a technical bounce, we could expect huge resistance at 101.7
- If the structure breaks down without a dead cat bounce, we could expect some support at 82.5
DXY Fundamental Analysis
- Despite potentially bullish signs from a technical perspective, all fundamental aspects suggest otherwise:
- Due to the Covid Pandemic, we have seen quantitative easing take place at an unprecedented rate
- Biden proposed a
11T spending plan. Regardless of whether he can enact it, this is certainly bad news for the dollar- Talks of a $2,000 stimulus is taking place, and it's very likely that it could pass
- When the Fedd raises rates, the USD rallies strongly against assets.
- However, it was said that the Fed would keep the near-zero rates at least until 2023.
So what does this imply for the asset markets? How can we capitalize on this opportunity?
- The chart above demonstrates the following: US Dollar Index (DXY), Nasdaq Composite Index (IXIC), Bitcoin (BTC), and M2 Money Stock (M2)
- We can see the clear change in trend after the Covid shock in March
- The Covid outbreak began around late November in China, but it was only in March that the global financial markets were hit
- Ever since March 2020, M2 has grown at an exponential rate, and with this, the dollar has fallen dramatically while asset and security prices have risen significantly
- As fundamental factors may drive the DXY further downwards, it's reasonable to expect asset/securities prices to rally upwards.
- As such, it's important to understand that the returns you made in 2020, and will make in 2021, is a byproduct of strange macroeconomic situations, in which your cash is becoming trash.
- It may seem like you're earning money, but in reality, most of it is asset/security prices being inflated.
Does this mean we are in a bubble?
No one can predict the future, but in my humble opinion, it's hard to confirm that this is indeed a bubble.
To understand my perspective in depth, check out my previous analysis below:
For us to not undergo another bubble that'll be written down in history, it's important that we see the real economy catch up with the rather hyped-up financial markets. Of course, we'd have to see the majority of the world's population get vaccinated, and have the Covid pandemic settled to an extent, where people can have their normal lives back.
It's important that capital be invested into medium-small businesses, which serve as real jobmakers, and have individuals consume goods and services, rather than save their money, or invest in financial markets.
Conclusion
In conclusion, it's important that retail investors and traders focus on improving their sharpe ratio this year. We may, or may not be in the middle of a bubble. Only time will tell. What we can do, is meticulously manage risk, and focus on maximizing returns while reducing the chances of losing it all, in case this market does turn out to be a bubble.
If you like this educational post, please make sure to like, and follow for more quality content!
If you have any questions or comments, feel free to comment below! :)
Note
For more a more in-depth look at my perspective on the US Dollar, check out my extensive and comprehensive analysis below![Advanced Education] Why the US Dollar is Going to Die
![[Advanced Education] Why the US Dollar is Going to Die](https://s3.tradingview.com/e/e3gatekl_mid.png)
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