The US Presidential elections are perhaps one of the most followed international events.
And that’s no surprise.
Beyond being the world’s largest economy, the domestic and foreign policies of the United States of America impact the rest of the globe in myriad ways. The value of the dollar, being the reserve currency of the world, influences commodity prices, as it is the benchmark pricing mechanism for most commodities and international money flows also sway to the tunes of the Dollar.
So, effectively, the movements in the dollar index not only impact currency traders but can be used in technical analysis to confirm trends related to commodities, currencies and stocks and stock indices.
The US Dollar Index measures the value of the dollar against a basket of six world currencies - Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound and Swedish Krona.The Euro is, by far, the largest component of the index, making up almost 57.6%of the basket. The weights of the rest of the currencies in the index are: JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).
The index was established shortly after the Bretton Woods Agreement dissolved in 1973 with a base of 100, and values since then are relative to this base.
In the past, the Dollar has outperformed during most election years, post the Presidential Inauguration period, except during 2008 and 2016.
During 2008-09 the Dollar index underperformed mainly due to the Monetary Stimulus by the Fed, which undertook Quantitative Easing and in 2016,due to the conflict between the US and North Korea.
Source: Dailyfx, Ventura Securities Ltd
More importantly, during election years between 2004 and 2016,the Dollar index has traded in the range of -2.0% to 1.2% between the Election weeks (in November) and the Inauguration period (in January).
This year, we expect the index to be more volatile during that phase, mainly due to
• A second Stimulus package (Negative for the Dollar index)
• A second Lockdown in the European region (Positive for the Dollar Index)
On the one hand, any delay in the second stimulus package will drive the dollar index northwards and at the same time, the second round of lockdowns in the European region will weaken the Euro against the Dollar, resulting in a stronger Dollar index.
Eventually, however, alarge Stimulus package is expected from the new government, the magnitude of which will determine how much downward pressure the Dollar index experiences.
During the 2008 recession and the recent Covid-19 crisis, the Dollar index weakened after Stimulus packages were rolled out. In the past, after the Stimulus packages between late November 2008 and 2011 (QE1 & QE2), the Dollar index lost more than 15%. Once again, in 2020, after the Covid-19stimulus package, the Dollar index has lost more than 9%.
Going forward, we expect the Dollar index to weaken after the Stimulus package. That being said, the ongoing uncertainly around the Stimulus package is likely to end soon after the Presidential Inauguration.
There's normally an inverse relationship between the value of the dollar and commodity prices. The prices of commodities have historically tended to drop when the dollar strengthens against other major currencies, and when the value of the dollar weakens against other major currencies, the prices of commodities generally move higher. This is a general rule and the correlation isn't perfect, but there's often a significant inverse relationship which plays out over time.
The table below suggests that the commodities market outperformed during the 2008 financial crisis and during the recent Covid-19 crisis, mainly due to a weaker Dollar index. Moving forward, any further weakness in the Dollar index in the coming days may once again prompt commodity prices to outperform or vice- versa.
Source: Ticker plant, Telequote, Ventura Securities Ltd
When the Dollar index weakens, the Rupee rises against the USD, and vice-versa. In the event of a falling USD-Rupee, Foreign Institutional Investors (FII) and Foreign Portfolios Investors (FPI) enjoy better returns on their dollar investments.
The table below suggests that during 2008 to 2011 and between March 2020 and Aug 2020, FIIs increased their investment in the Indian market. Effectively, during that time, as the Rupee appreciated against the Dollar, FIIs got better returns on their investments. At the same time, our Equity market outperformed during that period.
We expect any further weakness in the Dollar index in the coming years to drive further FII inflows into our equity markets, other things being stable or positive.
Source: NSDL, Telequote, Ventura Securities Ltd
Recently, large currency speculators reduced their bearish net positions in the US Dollar Index futures markets, according to the latest Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC).
The non-commercial futures contracts of US Dollar Index futures, traded by large speculators and hedge funds, totaled to a net position of 7,41 contracts in the data reported until 03r d November. This was a weekly gain of 1,995 net contracts from the previous week, which had a total of -1,254 net contracts.
Source: Countingpips, Ventura Securities Ltd
Technically, over the past three-month period (August to October 2020), the Dollar index saw range-bound trading movement between 91.70 and 94.80 levels. We expect that it will soon break out on either side in the coming days. If it breaks above 94.80 levels, then it will head towards 96.50 to 97 over the next one to two-month period. On the other hand, it will take strong support at 91.70 levels on a daily closing basis, breaking below which, it can drag down towards 88 levels over the next three to six-month period.
Source: Telequote, Ventura Securities Ltd
Technically, the USD/INR pair has been trading in a falling channel line over the past six-months period. We expect to face strong resistance at 75.25, going forward, on a daily closing basis. If it breaks above this level it will head towards 77 levels first, and after that to 78.50 levels over the next one to two-month period.
On the downside, it will take strong support at the falling channel line, which comes around 72 levels, approximately.
Source: Telequote, Ventura Securities Ltd
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