The Deep Dive

King Dollar

Beat the Bench’s Tuesday report The Deep Dive, is where I take you deep under the surface of the market’s most important stories and show you what the market is really saying and how to position for it. There should be no doubt that this week, that story is the dollar.

In yesterday’s edition of The Monday Morning Playbook, I said “The dollar is breaking things.” First it was the yen, and on Monday it was the British pound which hit an all-time record low against the dollar.

But as you will see, this isn’t just a forex story or something fun to read about, it has direct implications for client portfolios.

The dollar goes up until something breaks

Year over Year Change for US Dollar Index; US recessions shaded

The DXY Index is up more than 19% YTD, on track for what would be its strongest calendar year return ever (using data back to 1980). On a year over year basis, the dollar just crossed the +20% mark, something that has only happened six different times in history (I’m rounding up for the dot-com crash). These events all coincided with something in the global economy breaking, and many came just ahead of or during a US recession.

Overbought no matter your time horizon

US Dollar Index; Percent above/below 200-dma (bottom panel)

One of my favorite indicators to identify extreme overbought/oversold conditions from a long-term perspective is price relative to its own 200-day moving average. We are currently more than 11% above the 200-dma, a two standard deviation statistical extreme.

The 1980s exception

Something obvious likely jumps out at you about those two charts above. Nearly all those statistical extremes in the bottom panel, occurred right at major peaks in the dollar. So, it should be almost over, right?