As the negative impact of the global central bank flooding during the epidemic gradually emerges, the global economy is also beginning to falter, and markets in all countries will experience a very challenging period, and the investment outlook becomes very bleak. Against this backdrop, investors began to seek safe havens, and the U.S. dollar was a good choice.
Over time, global financial markets are changing, but the only constant is the herding effect of investors: when a crisis hits, investors will always shift the underlying investment from risky assets to the dollar.
During last year’s epidemic, people weren’t just rushing to buy toilet paper, they were also rushing to buy dollars. Last March, the Fed had to speed up money printing to meet the demand for dollars from other central banks because of the overwhelming demand for dollars.
So it would be foolish not to go long on the dollar at a time of market uncertainty. During the financial crisis in 2007, investors switched from defensive to offensive, investing in dollar-denominated financial products and making a fortune as a result.
Now that the most critical period is over, is there still a trading opportunity for the dollar?
Livewire analysts say.
“Currently, on the technical front, the dollar is on the verge of an important bullish signal.”
When the 50-day moving average (purple line) moves up and intersects the 200-day moving average (yellow line) and shows a medium-term trend of change, this is a classic bullish signal. This is especially evident in the dollar, where the two lines have intersected 15 times since 1999, and the dollar has risen 13 times.
Another observable indicator regarding the dollar trend forecast is inflation. livewire analysts believe that the rise in inflation was short-lived. 2020 saw downward pressure on the global economy and subdued demand, but as the economy restarted, demand was released and the US CPI for April was well above expectations as a result.
Used cars, rental cars, housing, airline tickets and takeaways alone accounted for almost 60% of the increase in CPI data. There is a crisis lurking inside these details, which is why Fed Vice Chairman Clarida quickly came out to reassure the market after the data was released, saying that the price increase only reflected temporary inflation.
Commodity prices have also attracted widespread media attention. Commodity supply shortages due to heavy speculative buying and an economic reboot have led to higher commodity prices, although this is not a long-term price trend.
If commodity prices fall back, this will ease price pressure to some extent. Considering the correlation between commodities and the dollar, once commodity prices fall back, inflation expectations will be depressed, which will also provide support for the dollar.
Currently, the uneven economic recovery and temporary rise in inflation have created a lot of uncertainty. At a time when financial conditions are extremely loose and complacency fills the market, extreme events tend to occur easily. Therefore, now is the opportunity for investors to free up capital for extreme events.
One way to do this is to buy both U.S. dollars and highly rated bonds. The returns generated by such a portfolio can be significant when the market suffers. the first quarter of 2020 is a prime example. At that time, the Australian stock market fell 23.4%, while the unhedged highly rated bond index returned +19.4%, providing a good hedge.
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