Is the U.S. Dollar in a long term bull market?


Saying that “the U.S. Dollar is in a bull market” isn’t the popular thing to say. Nowadays, the “smart” thing to say is:

  1. U.S. Dollar is going to hell.
  2. Inflation will surge, USD will crash, etc

People thought that the Fed’s quantitative easing (QE) would kill the U.S. Dollar. It didn’t. Which is to say that in forex (just like in the stock market), there’s a lot of financial dogma that’s not true.
The U.S. Dollar Index has been trading in a very narrow range over the past few months.

In fact, the USD Index’s range is so narrow that its 15 weekly standard deviation is less than 1% of its value. This has been happening for 11 consecutive weeks.

Here’s what happens next to the U.S. Dollar Index (historically) when its 15 weekly standard deviation is less than 1% of its value for 11 consecutive weeks (excluding overlapping cases).

Conclusion

This is very interesting. The U.S. Dollar’s long term outlook is actually bullish! (See 1-2 year forward returns). Very narrow sideways ranges seem to result in USD breakouts on the upside.
I’m starting to think that the USD will go up in the second half of 2019 – 2020. As you probably know, our Medium-Long Term Model for the U.S. stock market will probably switch from long term bullish to long term bearish in mid-2019. Hence, a U.S. economic recession is likely to start in late-2019 or 2020.
I think the next recession is going to be very different than the last one:

  1. In the 2008 recession, the U.S. was much worse than other countries because there was a lot more financial excess in the U.S. than ex-U.S.
  2. Today, other countries are much weaker than the U.S. If other regions like the EU, China, emerging markets are barely limping along while the U.S. economy is on fire, imagine how much worse they’ll be when the U.S. itself falls into a recession. I think ex-U.S. will be much worse than the U.S. during the next recession and bear market.

This supports the case for a rising USD in the next recession and equities bear market. When other countries deteriorate at a much faster rate than the U.S. in the next recession, the U.S. is relatively better off. Hence the USD rises vs. other currencies.
Interestingly enough, this also coincides with the long term bearish case on gold and silver (the USD and precious metals move in opposite directions in the long run).
Gold’s price action increasingly demonstrates signs that are characteristic of a precious metals bear market (here and here)
Long term bearish for gold and silver = long term bullish for the USD.
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