In the world of mainstream economic wisdom, the "laws" of fundamental market analysis are far less "writ-in-stone" than they are "writ" in non-hardening modeling clay; they shape AND reshape themselves to fit the news of the hour, taking on completely different forms than the ones that came before.
Take for instance the recent "re-sculpting" of this familiar mainstream "mould" -- A rising U.S. trade deficit causes a drop in the value of the U.S. dollar, and vice-a-versa.
See, back in early 2008 and late 2009, the notion of an inverse relationship between the deficit and the dollar was alive and well. It's no coincidence that those two periods also saw the greenback locked in a 20%-plus downtrend to abysmal new lows alongside widespread calls for replacing the dollar as the world's reserve currency. Here, the following news items from the time draw a clear picture:
- “If something is unsustainable, it’s going to have consequences: so far the consequences [of the record-high deficit] have been a general decline in the dollar.” (March 2008 Bloomberg)
- “It will take years for the greenback to recover its value and prestige. You have the U.S. still holding this trade deficit. So, it’s a very dark outlook for the dollar.” (April 2008 St. Louis Post-Dispatch)
- "Soaring Deficit: The Dollar's Death Knell" (November 2009 Associated Press)
Flash ahead to today and the old dollar-deficit form is completely unrecognizable. To wit: The August 11 Commerce Department report revealed a $7.9 billion increase in the U.S. Trade Deficit for June. This was the biggest rise since record keeping began in 1992 and brought the overall trade gap to a 22-month high.
YET -- when the "nightmarish" deficit figure went public, the U.S. dollar actually rose alongside this new "explanation":
"The negative data keeps investors cautious and as a result increases risk-aversion of the market. This boosts the dollar, which is considered a safe investment. As long as the US economy continues to provide negative signals, the dollar may rise further." (AP)
While fundamental analysis fits the news to suit price action -- Elliott wave analysis does just the opposite: It defines price action first, and the news follows. Case in point: Over the last year, EWI's leading analysts have remained one step ahead of the dollar's biggest turns -- as the following archive of our publications makes clear:
2009: (One day before the dollar's low) November 25 Short Term Update:
"The US Dollar Index is making a 'final probe' to complete the wave structures. When viewed in the context of the daily chart, the decline from the November 3 high still looks best as a fifth wave, which is an ending wave. A rise above __ level will be the initial signal that a low is in place."
December 4 STU: "A Bottom in the US Dollar Index. The initial leg of this turn up should be sharp, as overleveraged dollar bears are forced to cover their position."
2010: On the very day of the currency's low: June 7-9 Short Term Update:
"As we said Monday with respect to the US Dollar Index: "We will afford the upside every opportunity to complete the final subdivisions of wave 5. A decline beneath today's intraday low would all but ensure that a dollar top is in place already and that prices were starting a multi-week to multi-month decline to correct the advance from the November 2009 low of 74. 17."