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Is The Cyclical Dollar Bull Market Over?

September 11, 2020 By Mircea Vasiu

Investors of all sorts use all kinds of data to build up trends and form an educated guess about the path of financial markets. From technical to fundamental analysis, trend indicators to oscillators, and financial news – everything is interpreted with the aim of finding good opportunities to invest.

However, the market efficiency principle claims that everything is priced in anyways. So, why bother in the first place?

Opportunities do exist. For the trader, investor, researcher, with the most innovative and original way of analyzing big data, the info always says something different. As a side note, big data is responsible for the way we digest information that makes markets efficient. Progress in big data analysis and interpretation makes it easier to discover inefficiencies.

Is the Dollar’s Strength Over?

A quick look at the picture above tells us that January is, by far, the best month of the USD in the last four decades. Average monthly returns in January almost reach one percent.

This alone represents a great investment thesis. When presenting their stock performance, companies present the information with the assumption that the dividends are reinvested. This way, the CAGR – Compounded Annual Growth Rate – is bigger. The same here. If, for the past forty years, an investor would have bet on the USD in January of each year and reinvested the profits, that alone is a great reward for the investment.

A recent study run by BCA Research used such data to interpret the cyclical USD movement. One of the conclusions is that last August, the DXY (Dollar Index) ended the month below an upper sloping trendline that underpinned its lows for almost a decade now. From a technical point of view, the implications are that the dollar bull market is over.

Before anything, let us step back and check the data interpreted here. First, this is yearly and monthly data, so any turnaround will not happen overnight. Second, the DXY is made out of various currencies, with the Euro weighing more than fifty percent of it.

The EURUSD did decline in the aftermath of the 2008-2009 Great Financial Crisis. It entered the crisis close to the 1.60 level and fell all the way to the 1.04 area in the subsequent years.

If the cyclical dollar bull market is over, the DXY may have already peaked. And, with it, the EURUSD bearish trend.