U.S. Dollar Multi-Year Upcycle is "at a Crossroads" – Julius Baer Techs

- Dollar's multi-year rally being questioned
- Julius Baer technical analyst says expect bulls to win out
- But traders should tighten stops in event of a breakdown

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New technical analysis of the U.S. Dollar shows the currency is at a crossroads where a long-term period of appreciation could be about to either flip over, or resume.

Charts show the U.S. Dollar Index - a measure of broad U.S. Dollar strength based on its performance against a basket of currencies - has been in a tight range since the third quarter of 2019, stuck between major support and resistance levels according to analysis from Swiss investment bank Julius Baer.

But, a new trend is likely to start as the Dollar story continues to evolve,

"The U.S. dollar is at a crossroads," says Mensur Pocinci, Head of Technical Analysis for Julius Baer. "The currency has been flat since Q1 2015, during which time it has made three attempts to start a new trend and failed. Now, after five years of flat performance, a new long-term trend is likely to start. As seen on the chart below, prices are stuck between the downtrend from 2011 and the uptrend from 2014."

"At the same time, a long-term momentum is bottoming. Thus, if the U.S. Dollar is still in a secular bull market, then it will avoid falling below the lows of Q1 2020 and will now prepare a breakout to the upside," says Pocinci.

The U.S. Dollar first entered a multi-year cycle of appreciation back in 2008, a time characterised by financial and economic crisis, and analysts are beginning to question whether the latest crisis caused by covid-19 will have the ability to start a new cyclical trend - be it higher or lower.

"The U.S. Dollar is at a crossroads – a new trend is likely to start – we give the bull the benefit of the doubt but tighten stops on longs," says Pocini. Nevertheless, Julius Baer say they remain open-minded about the next big trend in the U.S. Dollar and prefer to tighten stops on remaining U.S. Dollar long positions (EUR/USD at 1.1450 and USD/CHF at 0.92).

"A decline of the U.S. Dollar below these levels would add to the evidence that the currency has seen a long-term peak," says Pocinci.

The Euro-to-Dollar exchange rate is currently quoted at 1.1247 following a recovery from March lows towards 1.06. The Pound-to-Dollar exchange rate is meanwhile quoted at 1.2268, having been as low as 1.1448 in March.

For the Dollar to enter a new multi-year bout of appreciation it will need to make progress and break new ground against the Euro and Pound, on that note we observe that the Euro-Dollar exchange rate is incredibly resistant to declines below 1.08 while the same can be said for Pound-Dollar at 1.20.

The technical breathing room is therefore limited, and besides, the fundamental picture does not support the thesis of a renewed uptrend.

Analysts at Société Générale - the French-based multi-national investment bank and lender - say the outperformance of the U.S. economy relative to the rest of the world allowed the U.S. to attract global capital from investors looking to maximise returns.

But the coronacrisis and other factors mean that outperformance is no longer guaranteed and this leaves the U.S. Dollar exposed to capital outflows in a cycle where the rest of the world sees superior growth rates.

"In 2018/2019, U.S. GDP growth was 1% faster than in the eurozone, and US economic outperformance sent the dollar higher. The near term is even less clear than usual due to the COVID-19 pandemic, but as the world tries to get back to some kind of normal, we think the tables will turn: the eurozone will grow faster than the U.S., which continues to struggle with an earnings downtrend that was evident before the virus struck," says Kit Juckes, Global Head of FX Strategy at Société Générale.

The Dollar is still prone to bouts of appreciation, particularly when investors get cold feet over the current recovery in stocks and commodities as the world continues to grapple with rising cases of covid-19 will the U.S. continues to see cases shoot up in an apparent second wave of infections.

However, Mark Haefele, Chief Investment Officer Global Wealth Management at UBS AG says "we believe any dollar rally is likely to be short-lived."

Despite a recent rise in the Dollar Index, it remains 5% lower since its peak in mid-March, "and we expect this depreciation to continue for several reasons," says Haefele.

UBS see safe-haven flows into the U.S. Dollar reversing while the interest rate advantage that had previously supported the U.S. Dollar has also been eroded by monetary easing from the Federal Reserve, which has been more aggressive than its central bank peers.

"The U.S. could also be impacted by political uncertainty ahead of the November presidential race," adds Haefele. "We think investors should position for a weaker U.S. currency, a trend that appears to be already underway."