DXY Snaps Four-Week Losing Streak, Is It Time to Buy the Dollar?
The DXY snapped its four-week losing streak on Friday, leading some experts to believe that now is the time to invest in the greenback as its fighting spirit continues to shine.
"We have been recommending a trading range in the DXY between the 101 and 108 level. The DXY recently hit our buy zone, and we suggest it is time for investors to be long," BCA Research shared in a recent note.
BCA notes that the bullish outlook on the dollar is supported by history, particularly the consistency of ebbs and flows in the FX market during a rate cutting cycle. The dollar has typically been flat-to-down leading up to the first rate cut by the Federal Reserve, but this time it is already at its lowest point compared to previous cycles. This suggests that the potential downside could be limited if the Federal Reserve begins interest-rate cuts in September.
In past cutting cycles, the Fed has cut interest rates by close to 400 basis points on average over the 12 months following the start of an easing cycle. However, the market is currently pricing in Fed rate cuts of about 200 basis points, half of the historical average.
"The median rally in the DXY over the ensuing 12 months after the Fed eases policy is 5%," BCA added.
The divergence in monetary policy expectations between the U.S. and other major economies is also expected to support the dollar as policy in the UK and Euro Area is already very restrictive, potentially leading to a deeper recession relative to the US.
Despite the positive outlook, not everyone is convinced that the dollar's recent strength will lead to a prolonged rally. BCA notes that sentiment toward the dollar is already bullish, with most investors long on the dollar, which could lead to potential leveraged liquidation in long-dollar positions if a catalyst emerges.
"This catalyst will come in the form of higher stock prices, lower bond yields, and low volatility," BCA said, emphasizing the importance of tracking trends in volatility as it correlates closely with the dollar.
In conclusion, the current market conditions and historical patterns suggest that now could be a good time to consider investing in the dollar. However, investors should remain cautious and monitor key indicators such as volatility to assess the potential risks and rewards of this investment opportunity.