Where Will the US Dollar Go Now?

The beleaguered US dollar, long forlorn of any vestige of hope by the fiscal and monetary policy-induced abasement characteristic of the last 11 years, is enjoying its strongest multi-week rally since May 2012. Yes, you heard me right: There is currently US dollar strength.

Is this a safe haven play (Credit: “Er, yes?”; Equities: “Of course not!”)? Is the US dollar (USD) stronger on an absolute basis, or is the greenback merely “less bad,” evincing relative strength versus the comparatively miserable constituent contra-currencies comprising the USD Index? What’s with this USD/domestic stock correlation picking up steam over last five weeks, and now positive for the last two? What is that most barbarous of yellow shiny relics telling us, if only we have ears to hear? And lest we get ahead of ourselves: In this central bank era of Weapons of Mass Debasement (WMD), isn’t anything smacking of a long US dollar thesis Don’t-Fight-the-Fed DOA? And isn’t there a disconcerting measure of complacency inherent in the act of asking such a question?

Astute market observers are taking pause here to consider the intermarket implications of a sustained, strong dollar regime brashly staring down the quasi-structural ZIRP/LSAP headwinds emanating from the Fed.

Price is a recapitulation of all of these questions. Not the answers (face it -- most of these questions have no practicably obtainable answer), but the questions. Assuming the questions are worth asking, let’s turn to the USD itself. To do this, we’ll evaluate $DX_F, the ICE US Dollar Index futures contract.

What is happening with the US dollar has happened before, and not just the past few weeks; the last 10 months are a magnified echo of the six months preceding that.

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Some charts – like this one – are more about raw feel over trenchant analysis. Here, we learn two things:

1. The last 16 months have been comprised by a very orderly fractal pattern.

2. The latest US dollar rally appears to be shadowing the rallies of December 2011 and May 2012.

So is the greenback embarking on its third iteration of this pattern, or is this time different? It’s far too early to tell.

Interesting, but that correlation – remarkable though it may be – in itself just doesn’t have much utility. Fair enough. Let’s peer into the fractal one level deeper.

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Here, the last 16 months are technically articulated with two Harmonic Crab patterns (points to whomever can identify the quote, by the way). These harmonic constructions bisect the earlier-pictured fractal differently (and are in fact a rendering of an incomplete fractal themselves). In this context, the USD’s present 5-week rally isn’t a venture off into the unknown, but the beginning of leg CD of the larger Crab and not even halfway to its target between 87-88.