Wasn’t The Dollar Supposed To Go “UP” On A Rate Hike?

The dollar has been one of the biggest contrarian trades I have seen in years.  Every time the market is so certain about the direction it will run, it does the exact opposite and often in extreme fashion.  In my last weekend update, I noted how we called the multi-year rally off the 2011 lows when the market was expecting the dollar to crash due to all the QE.  And, I also noted how the dollar has been moving down after the Fed has raised rates, despite the common expectations that the dollar should rise.

Some days, if you listen really closely, you can almost hear the dollar laughing as it moves “unexpectedly.”

The same has happened with the Chinese Yuan. Recently, China spent 1 trillion US Dollars (a quarter of their FX reserves) over the past 3 years in an attempt to prop up the Yuan. However, the Yuan still lost close to 14% of its value against the USD over this time period.  Moreover, our lead analyst of our Forex Service, Michael Golembesky, appropriately advised a short in this market despite the Chinese “intervention.”  In fact, Mike and I wrote several public articles on this potential trade.  And, as you know, he has been quite successful in that trade, even though most others in the market would not consider such a trade in the face of the unprecedented action by the Chinese government. 

This past week, immediately after the Fed Chairman noted in a speech that it is likely they will raise rates at the upcoming March meeting, we saw the dollar drop lower.  And, if you remember my article last weekend, I noted that I see a multi-year top forming in the dollar no matter what the Fed does, and warned you that the dollar can certainly head lower even in the face of the Fed raising rates.  While I certainly can be wrong in my analysis and expectations, as I am human, I found it quite interesting that the dollar reacted exactly in the opposite manner in which everyone would expect on Friday, yet again.

And, if these examples make you wonder if any central bank has any real control over the market, then you are finally thinking for yourself in an intellectually honest manner rather than accepting the current “market-think.”  This should truly make you realize that “manipulation” is not what moves the market in its larger trends.

As far as the short-term, the market still has not made it abundantly clear that a long-term top has finally been struck for wave (3). The current rally has been quite overlapping, but still leaves the potential open to the market making a higher high in the 104-105 region in an ending diagonal.  We still would need to break below 100.41 to invalidate that potential. But, I suspect that the market has completed wave (3), since we have struck the long-term trend line, as well as long term target we set years ago.

See charts illustrating wave counts on the U.S. Dollar Index (DXY).