Dollar holds a key

US Dollar holds a key

Looking beyond 2015, what is the single most important factor to consider when it comes to equity investing.? the answer may be simpler than you think: it is the greenback!!

Let me put it this way, two points:

  1. a stronger dollar acts as a drag on the U.S. economy, and hurts corporate earnings and commodity prices.
  2. A key determinant of the pace at which the Fed continues to raise rates is likely to center around the U.S. dollar.  Continued dollar strength would likely slow the pace of the Fed’s rate increases.Any sustained countertrend moves in the dollar, commodity prices or inflation could trigger a faster pace of rate increases.

Then what is the trajectory of the USD? Let’s look at the following chart (courtesy of Barron’s online)

USD

  • short term:

1.  the chart pattern looks more like a “W,” which leans bullish.

2.  it could be a simple pullback at resistance following the breakout from a triangle pattern. Either case leans bullish.

  • Longer term: in the currency markets, trends tend to last for several years. The current rally broke free from a multi-year sideways pattern just last year, so the potential for several more years of gains is solid, even if those gains happen at a more modest pace.

2015 has been a very difficult year for mutual funds and hedge funds with over 77% of them underperforming the benchmarks which they track.  Why is this dismal performance? The answer:  they were whipsawed by market cross currents; many market indicators gave off false buy and sell signals in this trendless, and yet volatile year. Hopefully, with the US dollar index as the single most important factor to consider, we may finally have a reliable beacon of light to look for when navigating into uncharted waters of 2016.

Keep trading and keep learning!

Albert Yang

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