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U.S. Dollar: From "Trump Bump" to Trump... Slump?

No surprise here! The dollar's five-month long selloff fit its Elliott wave script to a T (not as in "Trump")

by Nico Isaac
Updated: May 18, 2017

Sometimes the world of finance feels like an Old Western. Investors in 10-gallon hats stand beside their Conestoga wagons (i.e. markets), waiting for the right horse (i.e. news event) to hitch to and ride onto a new life (i.e. price trend).

At the start of 2017, for U.S. dollar investors, there was one horse and one horse alone -- freshly elected President of the United States Donald Trump. That ride, said the experts, would take prices into the sunset of a new bull trend.

It seemed foolproof. Trump gets elected. Expectations abound for a Trump-led economic recovery, and by proxy, a hefty greenback. And like clockwork, the dollar enjoys its strongest rally against the euro since the shared currency's inception in 1999, and the most powerful surge against the yen in nearly 40 years.

The rally should've continued, as these late 2016/early 2017 news items make clear:

  • "Dollar Soars to 14-year Highs on Trump Plans... including fiscal stimulus via infrastructure spending, would complement the Fed's pace of rate increases and boost the dollar further." (Reuters)
  • "Dollar Soars on Bets that Donald Trump Could Spur Inflation. Clearly the market has settled on a 'buy dollar' theme on the basis there will be a debt-fueled fiscal binge that will push up inflation." (Fortune)

What happened next also should've kept the buck's bullish fire aflame: The Fed followed Trump's hawkish cues, raising interest rates twice in three months, its fastest pace of hiking in over a decade.

And yet, instead of soaring into the new bullish frontier, the dollar turned down in early January in a powerful reversal to six-month lows on May 17. The reason why may surprise you.

See, in our experience, news events don't drive financial markets, no matter how shocking or unprecedented those events may be. Price trends, instead, are triggered by investor psychology, which unfolds as Elliott wave patterns directly on a market's price chart.

At the beginning of 2017, in fact, our Monthly Commodity Junctures editor Jeffrey Kennedy outlined the entire year ahead for the U.S. dollar based on two potential Elliott wave set-ups unfolding on the dollar's price chart. Both set-ups were "topping" scenarios, though one suggested a peak now rather than later.

There, Jeffrey presented the immediately bearish case:

"I'm trying to be as precise as possible to give you the best forecast I can possibly offer. It is not uncommon for a dollar peak to occur early in the year, in January.

"If we go to the monthly price chart, we're currently working a bearish engulfing pattern... if we begin to fall below the lows we experienced this month, that would actually support the idea that the dollar index is going to continue to decline for the next three to five months. So we have supporting technical evidence in favor of this bearish [Elliott wave] interpretation."

The next chart shows the extent of the dollar's decline to six-month lows since then.

Now, after the fact, after five months of decline, the mainstream experts have a new spin on the dollar's formerly expected "Trump bump." This May 17 Reuters headline:

"Investor's Rethink 'Trump Trade.'"

We think it's time to "rethink" the news-led interpretation of price action altogether.

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