The U.S. dollar has rallied just over 3% year-to-date (YTD), but new developments in the trade war with China and technical analysis suggest that we could see a decline. The uptrend in the U.S. Dollar Index, which has been intact since the start of 2019, hit a new high on May 23, 2019 before selling off due to heavy resistance and fears of China potentially dumping its U.S. Treasuries holdings. If the U.S. dollar were to turn lower, beaten down commodities could get a much-needed rally.
USD Charts: Daily & Weekly Both Flash Warning Signals
Analyzing the daily chart is ideal for determining the potential price action over a short-term period. The weekly chart can help indicate the intermediate-to-long-term period direction. Finding charts with corresponding signals on both the daily and weekly can be seen as higher probability. The USD index’s technical analysis is flashing warning signals on both the daily and weekly chart.
The daily chart highlights the uptrend channel, which started shortly after the start of 2019. On May 23rd, a bearish engulfing candle occurred after a report came out showing China sold off an abnormally-large sum of $20 billion in U.S. Treasuries. Wall Street immediately began to fear about the potential of China weaponizing its $1.2 trillion worth of American debt.
On May 24, 2019, the U.S. dollar finished lower by 0.34%, which effectively confirms the prior bearish indicator from day before. Ominous signals can be seen in negative divergences in the USD index’s MACD and RSI indicators. Negative divergences in these indicators show that the bulls’ strength is weakening and could see coming pressure. Lastly, slow stochastics are just coming off a fresh bearish crossover and are trending lower.
U.S. dollar weekly chart features similar issues as the daily chart. Prices have continued higher, despite negative divergences in the RSI and MACD. The MACD in particular shows the bullish position is very fragile. Over the past year, the U.S. dollar index has seen a steady decline in volume, which further shows that the rally has been driven by low volume. Slow stochastics recently saw a bearish crossover and are beginning to trend lower, but are still in overbought territory.
Goldman Sachs Group, Inc. (NYSE: GS) Issues “Cautious Buy” Alert For Commodities
In a note dated May 23, 2019, Goldman Sachs Group, Inc. (NYSE: GS) analysts indicated that commodities could be a “cautious buying” opportunity, after a particularly tough week for physical assets. Analysts estimate that the S&P GSCI commodities index could see returns of around 6.10% over the next three months. Furthermore, Goldman sees greater chance that the U.S. and China will be able to eventually reach a trade agreement, which is seen as a driver for demand in commodities.
Goldman Sachs has grown increasingly bearish on the U.S. dollar over the past few months. In early May 2019, analysts reiterated their medium-term bearish view on the USD. The bearish thesis was backed by views of improving growth out of the Eurozone, Chinese stimulus, higher rates than average of G10 nations, and a potential interest rate cut.
Overall, the USD has had a strong start to 2019 thanks to protectionist trade policies, strong economic data, etc. However, the daily and weekly charts of the U.S. dollar index show strong bearish divergences, declining volume, and rallies built off of low volume. Goldman Sachs has doubled-down on its intermediate-term bearish call on the USD with its “buy” call on commodities and forecasting over 6% returns over the next three months.