Many articles in last few days attempt to link a decline in US Dollar to a correction in bonds. Technical analysis is used to justify bias. These markets are known for often violating technical analysis since their direction depends on political decisions.
One thing I have learned in more than 25 years of trading and market analysis is that there are two markets that knowledgeable traders are very cautious about: Bonds and the US Dollar. The Bond market is tightly controlled by Fed policy and the US Dollar is highly affected by both Fed policy and decisions at the G-7 level.
In fact, price action in these two markets is highly unpredictable. For example, I mention in my book Fooled By Technical Analysis the failure of a complex head and shoulders pattern in bonds (TLT) formed between November 2011 and March 2012, as shown below.
This bearish pattern was for many well-known technical analysts then the sure signal of a downtrend in bonds. The pattern failed and sent another message that bonds do not care much about technical analysis.
Someone published an article with the story about US Dollar following bonds down the other day and the idea has been copied and published many times. I was surprised to see that done by some people I thought they were experienced.
As it is shown in the chart below, the 0-lag, 60-day correlation of UUP and TLT is negative for both price and returns.
A correlation chart is not even needed; a downtrend in bonds started in July of last year while the uptrend in US Dollar started in August of last year. Although recently the correlation in the price of these two assets has increased, it is still negative.
In addition, the correlation between bonds and the US Dollar is dynamic and depends on many factors including political decisions. This means that although there is a possibility that the US Dollar will follow bonds down, as one of several possible scenarios, any attempt to justify this using technical analysis reflects the typical and notorious practice of confirming bias.
Again, I would like to emphasize this: Anyone who attempts to make predictions about currencies using technical analysis, and especially the naive type of analysis involving random patterns and lines drawn on charts, has no serious experience with the markets. I will end this brief article with a joke.
God appears in front of Joe
God: Joe, you have been a very good person in life. I will fulfill one of your wishes.
Joe: I want a spaceship to go to Mars before Elon Musk gets there
God: Any alternatives?
Joe: Yes, I would like to learn how to forecast correctly currency moves
God: Joe, spaceship ready…
If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY
All charts were created with Amibroker – advanced charting and technical analysis software. http://www.amibroker.com
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