US Dollar Running out of Steam?

“I put a dollar in one of those changes machines. Nothing changed!” – George Carlin

The US Dollar has been on a tear vs. the World’s major currencies for a while now. The Dollar is at its highest level against the Yen in 7 years, representing a 45% jump in just two years. The Euro Dollar is just about at its lowest point since the summers of 2010 and 2012, and approaching lows not seen in 8 years.

The end of three cycles of Quantitative Easing, and just the discussion of tightening/raising rates is leading to some monstrous rallies for the Greenback. Meanwhile, Japan and Europe are providing more stimulus and are willing to take further measures. Monetary stimulus was expanded by the BOJ a couple of weeks back in a bit of a surprise move, and last week Mario Draghi reiterated the ECB’s commitment to stimulus and an increase in those efforts if necessary.

The economic picture in the U.S. continues to strengthen. Employers added 214,000 jobs in October, and although missing analyst expectations of 235,000, the unemployment rate fell from 5.9% to 5.8%. “The labor market is showing remarkably solid and consistent gains in jobs,” with overall payroll growth topping 200,000 for nine straight months, RDQ Economics wrote in a note to clients. That’s the longest such stretch since the mid-1990’s. (USA Today).

So, the big question here seems to be how long will this rout continue? The fundamentals certainly seem to support continued dominance of the US Dollar but what does history tell us?

At EidoSearch, we use history to get an objective gauge for the likely outcomes at times like this by seeing how the markets have reacted to similar environments historically. We’ve studied this in a few different ways, first looking at projections for two of the primary currency pairs: The Euro Dollar and Dollar Yen.

We analyzed the current 3 month price trend in the EUR/USD, and found 47 similar (statistically) historical instances of the current price trend dating back to 1998. The Euro rebounds against the dollar 60% of the time an average of .9%.

We then looked at the current 3 month price trend in the USD/JPY. We found 42 similar historical instances of the current price trend dating back to 1996, and the Dollar loses ground against the Yen 60% of the time an average of -.8%.

Then, we wanted to narrow in on “similar environments historically” even further. EidoSearch has the ability to incorporate multiple sets of time series data at the same time. So, we pumped both the current 3 month price trend in the Dollar Yen AND the current 3 month price trend in the Euro Dollar into our software to see when both currency pairs have traded in a similar fashion historically.

We found 19 instances dating back to 1999, and the results are similar to the above. The Euro typically rallies against the dollar (although more muted) and the Yen rebounds against the dollar. Per the 2nd chart/table below, you can see that the Euro is up 2/3 of the time historically vs. the Dollar, and the Yen is up vs. the Dollar 2/3 of the time.

Finally, to broaden the search, we looked at all 14 major currency pairs with the US Dollar. We’ve attached a table below showing the 1 month forward projection for each. In only 3 of the 14 currency pairs, is the US Dollar projected to continue its move against its counterpart.

For clients, please let us know if we can assist you in replicating this analysis in the software or if we can assist with any custom studies.

Have a great week!