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The year 2015 is coming to an end and we’ve seen a lot this year. Not only did we see a much stronger dollar, the gold price also weakened despite the dire economic situation in, well, everywhere in the world, terrorist attacks and additional tensions between a NATO member and Russia. Additionally, the Federal Reserve seems to be on track to increase the interest rate before the end of this year. In fact, as you can see on the next chart, gold has now almost reached a 6 year low, but two important indicators are indicating the yellow metal might have been oversold lately.
Source: stockcharts.com
An increased interest rate theoretically means a currency would become even stronger as there would be a higher demand for the US Dollar, especially in the current near-zero interest rate environment all over the world. However, there are additional elements at play here.
From Monday on, it’s not unlikely the US Dollar will see its ratio in the Special Drawing Rights basket being reduced in favor of the Chinese Yuan. Earlier this year, China has openly demanded the IMF would include its currency in the basket considering the country’s economy now is one of the largest in the world. There were quite a few people who doubted this would effectively happen, but China has made all the necessary steps as it promised a better market transparency and has even provided an updated status of the total amount of gold on the balance sheet of the Central Bank (and whether or not that’s the true number remains open for discussion. A long discussion.).
Source: bullionstar.com
We expect the IMF to confirm on Monday the Yuan will indeed be included in the SDR basket, and this could weaken the position of the US Dollar around the world. One of the main reasons why the US Dollar gained a lot of strength lately wasn’t because of the ‘strong’ economic situation in the USA, and it wasn’t because the market was anticipating a rate hike. No, the US Dollar was appealing as a world reserve currency because it was worldwide seen as a safe currency but now the Yuan is being accepted by the IMF as part of its Special Drawing Rights basket central banks all over the world might be tempted to convert some US Dollars into Yuan as the Chinese currency will gain a lot more credibility and legitimacy overnight due to the decision of the IMF.
Source: stockcharts.com
Even the chart of the US Dollar Index shows some signs of fatigue. After the most recent run, the Relative Strength Index has almost reached an ‘overbought’ status whilst the MACD is about to make a negative crossover. These two indicators could point in the direction of a weaker US Dollar in the next few weeks.
In a previous column at Secular Investor, we already expressed our surprise about some weird trading patterns in the foreign exchange markets, and now the Yuan will probably be added to the SDR basket, we might see some more ‘weird’ swings. Is it time for a 'Dollar crash'? We wouldn't be surprised if it is.
The US Dollar might have reached the top of its strength and could see a downward correction in the next few weeks.
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