The dollar is falling for the fifth straight day after gaining for 7 days out of 8 and surging 8.5%. It might be time to start thinking of getting back in: the greenback has already corrected 2.3% of its prior move, suggesting profit-taking should slow down.
After the longest equity bull market on record ended with a savage bang as the deadly coronavirus pandemic began to spread, we expect equities to keep falling for as long as they remain within a downtrend. And, equally, we expect the dollar to resume its status as the quintessential haven in times of global turmoil.
There is, however, a potential counter fundamental force — some analysts are suggesting the possibility of a concerted global effort from central banks to weaken the dollar, something that hasn't happened since the Plaza Accord in the first half of the 1980s. That period saw the dollar plunge 48% between February 1985 and November 1987.
However, we don't believe the situation now is comparable to what happened then. The 1985 global intervention took place after inflation peaked in April 1980 at almost 15% and the U.S. dollar strengthened 50% against the currencies of the other four biggest economies of the time, nearing 165.00.
Now, the annual inflation rate is 2.3%, falling from 2.5%, and the dollar is falling to 100.00.
While we think it's unlikely such an accord is in the pipeline at all, it's important to note that even if it were, such a coalition would take time to organize and would definitely make a lot of noise. This would give traders enough runway to reposition themselves if they needed to.
Trading Strategies
Conservative traders would wait for an established uptrend, when the greenback registers a price higher than the March 19, 102.99 high, after waiting for another take-profit correction which fights to hold its footing.
Moderate traders may risk a long position if the dollar consolidates at the 100 level.
Aggressive traders, quicker on the trigger, may commit to a long position according to their risk aversion and after writing a coherent trade strategy.
Trade Sample
- Entry: 100.40
- Stop-Loss: 99.90, below the 100.00 psychological round number and support of the failed broadening pattern
- Risk: 50 pips
- Target: 102.90, below previous high
- Reward: 250 pips
- Risk:Reward Ratio: 1:5