The U.S. Dollar has a history of peaking in March and moving lower until at least June. Is history about to repeat?

Seasonal influences

A 20 year seasonality study recently completed by EquityClock.com shows that the U.S. Dollar tends to move higher in January and February, peaks in March and trends lower until at least the beginning of June.

Chart courtesy of www.equityclock.com

Technical influences

The U.S. Dollar Index currently has a deteriorating technical profile. The Index reached an intermediate peak on February 19th at 81.34. Short term momentum indictors including Moving Average Convergence Divergence and Relative Strength Index have rolled over from overbought levels and continue to trend lower. Intermediate downside risk is to the top of a previous trading range at 78.45.

Fundamental influences

The U.S. Dollar is expected to remain under pressure until at least June this year due to a series of political and economic events:

• The financial crisis in Greece is close to resolution. Greece’s political leaders know that a resolution must be reached shortly in order to avoid default on its sovereign debt. Meetings later this week will determine whether resolution is achieved through the International Monetary Fund or through European finance ministers. A resolution will strengthen the Euro and weaken the U.S. Dollar.

• Recent actions by members of the U.S. Congress against China potentially could lead to an international trade and finance crisis later this year. Last Monday a group of 130 Democrat and Republic lawmakers petitioned Treasury Secretary Timothy Geithner to brand China a “currency manipulator” when he releases a report on the subject in April. The lawmakers are saying that the Chinese are in effect subsidizing exports by maintaining a low value of the Chinese currency relative to the U.S. Dollar. Under legislation proposed by lawmakers the Treasury Department is required to indentify countries with “fundamentally misaligned currencies” and to issue a “priority action” against them. Countries on the “priority” list could face a range of U.S. responses including a revision to dumping calculations, a halt in government purchases of goods and services and a restriction on trade finance and insurance. A prominent U.S. media spokesman said last week that the actions by Congressional members are equivalent to “poking a stick in the eye of your banker”. The lawmakers seemed to have forgotten that China is the largest holder of U.S. Treasury securities and, until late last year were the largest purchaser of Treasury issues used to finance the U.S. government’s mounting budget deficit. China owns more than $700 billion of U.S. Treasury securities. The Chinese already are responding to a growing protectionist stance taken by Congress. The February Treasury International Capital Systems (TICs) report released last week revealed that China was a net seller of U.S. Treasuries for the third consecutive month. Relations between China and the U.S. have deteriorating significantly in recent weeks due to a series of issues including the U.S. sale of weapons to Taiwan, the threat to Google’s presence in China and cyber attacks reportedly initiated in China. Chinese efforts to liquidate even a small portion of their Treasury securities could place significant downside pressure on the U.S. Dollar.

• A decision by the Federal Reserve last week to maintain a low interest rate policy rather than to protect the U.S. Dollar with a policy of slightly higher interest rates also adds to downside pressure on the U.S. Dollar

What to do

The U.S. Dollar is following its seasonal pattern once again. Preferred strategy is to avoid investments in U.S. Dollars unless fully hedged. Commodities priced in U.S. Dollars will see higher prices under this scenario. Basic material and energy securities will outperform as the U.S. Dollar moves lower.

Don Vialoux has 37 years of experience in the Investment Industry. He is a past president of the Canadian Society of Technical Analysts (www.csta.org) and a former technical analyst at RBC Investments. Don earned his Chartered Market Technician (CMT) designation from the Market Technician Association in 1995. His CMT paper entitled “Seasonality in Canadian Equity Markets” was published in the Spring-Summer 1996 edition of the MTA Journal. Don also has extensive experience with Exchange Traded Funds (also know as Index Participation Units) as well as conservative option strategies. In 1990 he wrote a report that was released in the International Federation of Technical Analyst Journal entitled “Profiting from a Combination of Technical and Fundamental Analysis”. The report introduced ” The Eight Phases of the Stock Market Cycle”, an investment concept that continues to identify profitable entry and exit points for North American equity markets.   He is currently a member of the Toronto Society of Fundamental Analyst’s Derivatives Committee.   Now he is the author of a daily letter on equity markets available free on the internet. The reports can be accessed daily right here at www.dvtechtalk.com.