Has the Dollar Bottomed for a Decade or More? A Smacth Ahead.?

A scan of yearly and quarterly charts reveals reversal opportunities in the USDCHF (yearly and quarterly), AUDUSD (quarterly), NZDUSD (quarterly), and USDCAD (quarterly). I define a reversal with yearly data as a new 5 year high/low, a close above/below the prior year’s close, and a range for the year that is at least as large as the average range for the last 5 years. A reversal with quarterly data uses 12 periods (3 years) (for monthly 12, for weekly 13, and for daily 20). No method is immune to false signals, but key reversals indicate favorable reward/risk opportunities because a potentially significant pivot (high or low) is identified with minimal lag (when viewed in the context of the time frame being analyzed).

Many decade long turns have been indicated by yearly or even quarterly key reversals. A look at EURUSD yearly bars illustrate this point (arrows indicate yearly key reversals). The study also highlights the tendency for exchange rates to reverse during high volatility environments (hint – USDJPY volatility is NOT high which decreases the probability that an important low is in place).

EURUSD YEARLY CANDLES (since 1982 + DEM rates)

Created by Zeshan

The most recent yearly and quarterly key reversals are for the USDCHF, AUDUSD, NZDUSD, and USDCAD.

USDCHF YEARLY CANDLES (since 1982)

Created by Zeshan

Bearish reversals occurred in 1985 and 1998. 1998 was a false signal. This is the first yearly bullish key reversal.

USDCHF QUARTERLY CANDLES (since 2000)

Created by Zeshan

A bearish key reversal occurred in the 4th quarter of 2000. The 3rd quarter reversal of 2011 was the first quarterly reversal (bullish or bearish) since 2000.

AUDUSD QUARTERLY CANDLES (since 2000)

Created by Sarah 

A bullish reversal occurred in the 2nd quarter of 2001. Bearish reversals occurred in the 4th quarter of 2007 and the 3rd quarter of 2008. The 2007 reversal didn’t pan out. Price fell another 1900 pips (to the low) after the 2008 reversal (close to close was 897 pips). The most recent reversal occurred during the 3rd quarter of 2011.

NZDUSD QUARTERLY CANDLES (since 2000)

Created by Zeshan

A bullish reversal occurred in the 4th quarter of 2000. Bearish reversals occurred in the 3rd quarter of 2007 and the 3rd quarter of 2011. The 2007 reversal didn’t pan out immediately as the actual high was not until the 1st quarter of 2008.

USDCAD QUARTERLY CANDLES (since 2000)

Created by Zeshan

Since 2000, there has never been a USDCAD bearish quarterly reversal but there have been 3 bullish reversals; Q1 2004, Q4 2007, and Q3 2011. The 2004 reversal gave way to gains in the next quarter but eventually failed. The 2007 reversal resulted in a run from 1 to 1.30 within one year.

Summary

The most recent large degree reversals paint a picture of USD strength in 2012. Unless your holding period is a year or more (Ilya), I do not suggest treating these reversals as signals. Rather, understand that conditions for the pairs examined are consistent with previous long term reversals. This knowledge should help in constructing favorable reward/risk opportunities in 2012.