USDX: Trick Or Treat, Looks Like An Early Halloween

The FED has recently been tricked with its own money. Could the central bank’s scary reverse repos become a treat for the USDX?

The USD Index (USDX)

With the ghosts of 2015 attempting to scare the U.S. Federal Reserve (FED) into tapering its asset purchases, the latest reverse repo nightmare could be gold, silver and mining stocks version of the boogeyman. Case in point: with the liquidity fright helping the USD Index sleep better at night, the greenback should benefit from the FED’s latest house of horrors: And with the central bank’s daily reverse repos hitting an all-time high of $485 billion on May 27 (with another $479 billion sold on May 28), Halloween may come early this year.

Please see below:

To explain, the green line above tracks the daily reverse repo transactions executed by the FED, while the red line above tracks the federal funds rate. If you focus your attention on the red line, you can see that after the $400 billion level was breached in December 2015, the FED’s rate-hike cycle began. Thus, with current inflation dwarfing 2015 levels and U.S. banks practically throwing cash at the FED, is this time really different?

Likewise, with reduced liquidity poised to bolster the USD Index, not only are the fundamentals trending up but also the technicals. The USD Index jumped above its declining resistance line based on May’s highs, as well as the declining resistance line that started with the late-March high. This is important not only (and not primarily) because of the double-breakout. It’s important and particularly bullish, as it emphasizes that the third – and quite likely the final – short-term bottom in a row is already in.

In addition, the USD Index might be in the early innings of forming an inverted head & shoulders pattern. For context, an inverted H&S pattern is a bullish development that if formed, could usher the USD Index well above 94.5 (to about 97-98). However, completing the right shoulder requires an upward breach of 93 (the blue line), so at this point, it’s more of an indication than a confirmation.

Please see below:

For more context, I wrote previously:

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