Diary of a Financier

Chart Update: DXY 1995 Analogue

In Capital Markets on Thu 15 Mar 2012 at 19:04

As I’ve discussed, I’m a big proponent of a secular US Dollar (USD) bull market. Occasionally moving parts of the allocation back and forth between Gold (GLD) & Treasuries, I’ve maintained some position in the US Dollar ETF (UUP) since last summer, when I expected DXY to rally from <74 to its 82 prime meridian. 11% later, mission accomplished.

As the calendar has turned since my last US Dollar Index (DXY) chart update, I thought I would refresh my analogue, which relates 1995 to today:

DXY 1995 v 2011 analogue

I remain a bull on the secular USD trend, since the daily fractal is captive in a classic Cup & Handle pattern with a rim ~81.50. I expect a catapult above that resistance within a few weeks to a month:

DXY daily- Cup & Handle

However, regarding the analogue, I do acknowledge the possibility that it won’t materialize in full. Due to the precarious condition of federal finances, the mouthfeel of today’s story seems different. For example, when I overlay the Fed Funds Rate v. DXY, you’ll notice the rising rate environment in the 1990s:

DXY v Fed Funds- 1994-97 rising rate environment.

We will not see a rising Fed Fund Rate here today, because of those precarious federal finances. I keep referring to this reality as the Great See-Saw. More significant than the issue of our twin deficits, the Federal Reserve is guarding a detonator on its own balance sheet. Ben Bernanke has to tap-the-breaks on growth to stymie private-sector banks’ Excess Reserve deposits. If withdrawn from deposit with the Fed and unleashed upon the real economy, these Excess Reserves would stoke unpalatable inflation. In normal circumstances, traditional monetary intervention (Fed Funds rate hikes) would stem such a panic, but today’s Fed is harnessing a balance sheet flush with interest rate risk.

While this is all good and true, I have to acknowledge the state of Zero Interest Rate Policy (ZIRP). When the Fed Funds Rate hit its zero-bound, the Fed pursued Quantitative Easing as a means of supplemental monetary policy. This action managed to drop the real policy rate below zero, consistent with the recommendation of the Taylor Rule. Therefore, if I consider the fact that QE has ended (and monetary easing with it), real rates should start ascending from negative integers. Such action effectively achieves the same ends as the mid-1990s tightening cycle. This affirms my analogue and resonates to continued USD strength.


  1. […] All this does not imply that USD/UST confidence is already being lost. It implies that debasing deficit spending hasn’t started to any meaningful extent… at least not as a result of the 2008-09 crisis. Plus, currency confidence is a relative term given the inherent structure of floating FX markets. Relative to other major FX crosses, the USD has sustained, especially when the US Dollar Index (DXY) is viewed from a wide lens. […]

  2. […] you’re well aware, Dear Diary, I’m a proponent of the secular US Dollar (USD) bull. I’ve highlighted 82 as the USD Index’s (DXY) […]

  3. […] you’re well aware, Dear Diary, I’m a proponent of the secular US Dollar (USD) bull. I’ve highlighted 82 as the USD Index’s (DXY) […]

  4. […] $200b in short-term (1-3 year) securities still exist on the Fed’s balance sheet.  Cleaning out their inventory risks losing control of the front-end of the yield curve.  Therefore, the FOMC will extend the ZIRP promise through 2015 (previously 2014).  In Ben Bernanke’s mind, this measure should help pin short-term rates without the Fed there to soak up supply.  I want to note the pitfall of this strategy, were Mr. Bernanke’s Fed to depend on it as a ZIRP supplement.  Every day closer we get to 2015, part of the yield curve should unhinge from ZIRP as more maturities will fall beyond that 2015 reach.  For example, a year from now, the on-the-run 3-year Treasury will mature outside the ZIRP regime.  It’ll be interesting to see whether the curve steepens or low coupons (high duration) emerge from new-issue auctions.  A zero-bound Fed Funds Rate will keep nominal rates at zero, but real rates could run higher in an escape from current sub-zero standing–the Taylor Rule’s perscription. […]

  5. […] the US Dollar Index (DXY) was in March, when I updated my surveillance of the 1995 Analogue. I concluded: “I remain a bull on the secular USD trend, since the daily fractal is captive in a classic Cup […]


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