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Citi calls for a 15% crash in the US dollar index! What's the trade?

November 05, 2019 13:30

Did you know that the US dollar index is one of the world's most widely watched markets? After all, it does measure the value of the world's reserve currency, the US dollar, against a basket of foreign currencies from the United States' biggest trading partners. Any significant price movements in the dollar has huge ramifications for other other currencies like the euro and Japanese yen, as well as commodities like gold and oil.

With some analysts forecasting an impending crash in the US dollar index, there are some potentially very interesting trading opportunities developing in the last quarter of 2019. Let's take a look at the situation in more detail.

USD

A 15% crash in the US dollar index? Investment bank Citi thinks so...

According to Citi's head of Asia Pacific trading strategies group, the US dollar index could fall to as low as 85 which represents a near 15% drop from its October high. Their reasoning is down to the US Federal Reserve (the Fed) growing its balance sheet by purchasing more bond assets.

In September, the Fed announced it would resume buying bond assets to inject more liquidity into the overnight repo market which is essentially a market for short-term borrowing. Because banks need to have more capital reserves due to new regulations after the 2008 financial recession, a lot of them are struggling to hold cash reserves. The Fed have stepped in to make sure overnight loans stay constant.

According to Citi, when the Fed increases their balance sheet, the US dollar can fall. And, even though the Fed have put interest rates changes hold - after cutting rates three times this year already - the investment bank believes the Fed will be the most dovish of all the central banks.

That's because the Fed have already increased their balance sheet by more than $205 billion since the beginning of September - a size that would take the European Central Bank more than a year to complete.

So what does the price chart of the US dollar index tell us?

How to trade the US dollar index (USDX)

With Admiral Markets you are able to speculate on the US dollar index by using a product called CFDs, or Contracts for Difference. Essentially, this enables traders to go long and short on an instrument using leverage.

You can learn more about this in the 3,000+ word article: 'How to trade the US dollar index'. This also includes detailed information on how to place a trade on the index and a trading strategy example for you to get started on.

Below is the long-term weekly price chart of the US dollar index:

Index Trading Strategy

Source: Admiral Markets MetaTrader 5, USDX, Weekly - Data range: from 20 June 2010 to 5 November 2019, accessed on 5 November 2019 at 10:34 am GMT - Please note: Past performance is not a reliable indicator of future results.


In the long term price chart of the US dollar index, it is clear to see the most recent rise higher from the start of 2018. From the chart below, the 85 price target from Citi does seem quite far away:

Citi Target USD chart

Source: Admiral Markets MetaTrader 5, USDX, Weekly - Data range: from 20 June 2010 to 5 November 2019, accessed on 5 November 2019 at 10:35 am GMT - Please note: Past performance is not a reliable indicator of future results.


However, there are some technical analysis reasons on why the recent move higher could indeed be weakening. The first is the formation of a bearish chart pattern called a Double Top. This is where the market tops out at the same price level twice, suggesting buyers have lost momentum, thereby allowing the opportunity for sellers to take control, as shown in the screenshot below:

Double Top Chart Pattern

Source: Admiral Markets MetaTrader 5, USDX, Weekly - Data range: from 21 February 2016 to 5 November 2019, accessed on 5 November 2019 at 10:40 am GMT - Please note: Past performance is not a reliable indicator of future results.


While sellers have already taken control of the market, traders still need to be mindful that the higher low cycles of the uptrend are still in tact. In fact, the recent trend higher in prices has formed a trend line, as shown by the ascending blue line in the chart below:

USD Index Chart

Source: Admiral Markets MetaTrader 5, USDX, Weekly - Data range: from 20 June 2010 to 5 November 2019, accessed on 5 November 2019 at 10:45 am GMT - Please note: Past performance is not a reliable indicator of future results.


If the US dollar index can break the trend line it is a potential sign that buyers are no longer willing to buy the market at that particular price level which could open the doorway for sellers to take control. If this level does indeed break there are still some levels of support in the way before the market reaches the 85 level. However, it is a compelling reward to risk trade if it does play out.

While the technical chart still needs some work to confirm a downtrend, traders may also use this analysis to focus on other US dollar related markets such as the euro, Japanese Yen, gold or oil. Fortunately, with Admiral Markets users also have the opportunity to just trade the US dollar index CFD itself.

If you're feeling inspired to start trading, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that you can download the MetaTrader 5 trading platform provided by Admiral Markets completely free and access the US dollar index chart, along with advanced trading features such as more time frames, chart styles and indicators! Click on the banner below to start your free download:

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The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

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4.The Analysis is prepared by an independent analyst Jitan Solanki, Freelance Contributor (hereinafter "Author") based on personal estimations.

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