US Dollar Under Scrutiny – How Strong is the Buck Really?
Eric Furstenberg • 3 min read
Sometimes we need to turn our sights back and take a glance at the distant past. This is especially handy with FX trading to critically analyze a currency’s true performance over a certain period of time.
Human beings tend to be very subjective when it comes remembering certain events and circumstances.
You see, we normally tackle the financial markets with a certain bias or idea of where the prices will move, and when they will move. Even in hindsight, we often hold on to certain prejudices of what we would have liked to see happen in the markets.
This is the type of feeling I get when I look at the US Dollar’s true performance over the last year. The US dollar index, which is normally a good indication of general US Dollar strength, does not really give us a very clear picture of the core strength of this currency when we look back at 2016. A look at this index almost creates the illusion that the Dollar has strengthened against all the other major currencies in 2016 – which is far from the truth.
US Dollar Index Monthly Chart
As you can see, this index rose considerably in 2016. Remember, this index is a composite of the US Dollar against four equally weighted major currencies – the ‘Brittle’ Pound, Euro, Japanese Yen, and the Australian dollar.
So what is the cause of this ‘discrepancy’? I call it the Greatly Brittle Pound (Great British Pound). Truly, the Pound has been exceedingly ‘brittle’, and has declined aggressively against most currencies over the last year, and also against the US dollar.
The pound’s decline against the Dollar in 2016 was an amazing 2404 pips. This is the primary cause of the powerful rise in the US dollar index over this period of time.
GBP/USD Weekly Chart
The Brexit has mercilessly flung the pound into the dumps. A 2404 pip decline is no small loss, is it?
Besides the British Pound, the two other major European currencies also performed poorly against the Buck in 2016. The Euro surrendered 362 pips and the Swiss Franc 172 pips.
So which of the major currencies managed to gain against the Buck during 2016? The greatest gain in pips was by the Canadian Dollar which hustled 381 pips out of the Buck.
USD/CAD Weekly Chart
The mighty rise in the oil price in 2016 certainly had a very positive effect on the Canadian Dollar. Remember, the Canadian dollar and the oil price are highly correlated.
Next up, is the Japanese Yen which posted a gain of 320 pips against the Buck in 2016. This is difficult to believe when you look at the recent price action on the daily chart:
USD/JPY Daily Chart
The only thing we see on the chart above is the US Dollar running over the Japanese Yen like a garbage truck over a squirrel. But look at this weekly chart:
USD/JPY Weekly Chart
The recent bounce of almost 2000 pips has been unable to erase the massive loss which the pair incurred earlier in the year. Remember, when this pair declines, it means the Japanese Yen is gaining against the US Dollar.
The last major currency is the Australian Dollar which gained a lowly 11 pips against the Buck. What a terrible performance for a full years trading! Nevertheless, there was a gain, and a gain is a gain.
Outlook for early 2017 – January
The second half of 2016 saw the US dollar make a comeback against many of the major currencies. This bullish momentum is still largely intact. It would be prudent to stick to this bullish bias for now. Even the three major currencies which gained against the US Dollar in 2016, are currently showing considerable weakness against it.
So, although the Dollar posted a somewhat controversial performance in 2016, there is definitely some solid bullish momentum behind it at the moment.
I would personally be more comfortable as soon as proper liquidity returns to the market. If you’re trading this week, beware of choppy trading conditions as this week could still be subject to thin market conditions.
Monday will be closed for trading, but you will be able to trade again on Tuesday.
May you have a magnificent 2017 filled with great trades and much profits – happy new year!