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A Year-End Look at the US Dollar and a Trading Outlook for 2014

A Year-End Look at the US Dollar and a Trading Outlook for 2014

Tyler Yell, CMT, Currency Strategist

Talking Points:

  • US Dollar Showing A Multi-Year Uptrend
  • US Dollar Experienced a Cyclical Correction in Late Summer 2013
  • Should The Up Trend Continue, Here Are Trades To Consider

“The whole world is simply nothing more than a flow chart for capital.”

-Paul Tudor Jones, PTJ Capital

The US Dollar is the most commonly traded currency around the globe. Since 1945, the USDOLLAR has been a focal point for business trade flow and investing capital. What’s more, at FXCM, Trades involving the USDOLLAR account for 60% of the open interest on any given day. Therefore, if you have a good take on the USDOLLAR, you likely have a good take on the FX Market as a whole as well as some firm trade ideas that you can put into action.

Courtesy of Speculative Sentiment Index

Many traders know and love the concept of Multiple Time Frame Analysis or MTF. If you’re unfamiliar with the concept, MTF allows you to take an overall view and through deductive reasoning or if-this-then-that type of thinking narrow down to a trade idea. Practically speaking, if you see an overall uptrend showing you underlying strength but a near-term correction against the trend, you can look to enter back in the direction of the overall trend when the correction is looking weak.

US Dollar Showing a Multi-Year Uptrend

Presented by FXCM’s Marketscope Charts

From a MTF, perspective, you can see through the channel that I’ve drawn that the USDOLLAR has taken a few hits since the uptrend began in 2011. However, the overall trend appears to be firmly higher even with the corrections that have taken place once a year since 2011. Seeing this chart, should help you get the sense that the overall uptrend should continue unless a major set-back that is yet to be priced in the market shows up.

US Dollar Experienced a Cyclical Correction in Late Summer 2013

Most trends correct at some point before resuming the overall move. The key question a trader must ask themselves is where is the correction likely to end? The US Dollar experienced a 6% correction from July-October, which is significant on three fronts:

  • The correction ended with 0.1% of the August 2012 correction and Summer 2011 Correction
  • The correction ended at 161.8% Fibonacci expansion similar to the 2012 correction.
  • The 2013 US DOLLAR correction ended at the 50% Fibonacci retracement showing confluence

Of course, only time will tell if the cyclical correction and Fibonacci confluence marked a temporary bottom in the USDOLLAR before turning higher. If the above events point to a correction low for the US DOLLAR then 2014 may be met with a resurgence of USDOLLAR strength as the multi-year uptrend continues.

Should the Up Trend Continue, Here Are Trades to Consider

Before we rush to answer this question, it’s important to note why the US Dollar could strengthen from a fundamental view and further, who has benefited from the US DOLLAR’s weakness. Over the 4-month drop of the USDOLLAR, the biggest benefactor were G10 Smalls like the NZD, CAD, NOK & SEK along with Emerging Market Currencies like the MXN, ZAR, & SGD. These currencies benefited by having higher yields on government debt while the Fed’s quantitative easing or QE kept a steady stream of easy money flowing through the economy.

USD Basket Buy Could Be a Simple & Time Efficient Approach to Play USD Strength

Courtesy of

Because G10 Small FX currencies and emerging market FX have benefited from QE from the Federal Reserve and a weak dollar, it stands to reason that they would likely be the first to feel the pain of a strong dollar on the back of the Taper. A Taper cause pain to the aforementioned currencies because the capital flowing around the world as a result of QE would likely begin seeking developed markets as opposed to emerging markets like they’ve been.

Therefore, here are a few trades that I’d keep in mind if the Strong USD or Taper Trade takes hold:

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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