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STUDY OF US Dollar Index and its possible Correlation with NIFTY

US Dollar Index has come under focus recently once again after it witnessed sharp
volatilities across currencies after the Trump administration imposed tariffs of 25% and
10% respectively on Steel and Aluminum imports.

On the other hand, domestic markets have reacted to this along with global markets. To
add to this, we have also turned sentimentally negative over past couple of days while
we decoupled ourselves with the global markets and have shown gross relative under
performance. The recent banking fraud too have contributed enough to damage the
Markets sentimentally and make it technically weaker in the immediate short term.

While we deal with complex global factors affecting the Markets along with the
domestic factors which remain equally unique and important, we make an attempt to
examine diverse and contradictory technical indicators present on US Dollar Index and
its likely correlation with NIFTY which remains equally complex.

US DOLLAR INDEX – WEEKLY AND MONTHLY CHARTS

The above is the USD Weekly Chart. If we examine this Chart, it presents a bleak outlook or the
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Dollar in the immediate short to medium term. After trading in a long 26-month channel in a
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sideways trajectory an attempt to breakout failed and the US Dollar Index retraced even lower.
A Death Cross is observed with the 50-DMA crossing the 200-DMA from above. All this
translates into a weaker outlook for the Dollar Index in the immediate short to medium term.
While we analyze this, it has continued to enjoy a negative correlation with the NIFTY Index.

Now, let us examine long term Monthly Chart of US Dollar Index.

The close inspection of the US Dollar Index long term Monthly Charts presents a different
picture. It very clearly shows the otherwise bullish large Rounding Bottom formation spread
over 16 long years though got truncated in between between. Also, it shows a long accumulation
which happened over 6 years which resulted into upward breakout in the US Dollar Index. In
the process a Golden Cross was observed with the 50-Period MA crossing 200-Period MA from
below.

It is important and noteworthy to see that US Dollar Index has enjoyed strong negative co-
relation with NIFTY for the major part over last 18-years.

There is one more aspect that we need to analyze before we reach any useful conclusion. This
aspect is of inspecting long term Monthly Chart of US10-Year Treasury Yields.
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Recently, the US 10-YR Treasury Yields are testing their 4-year highs. More important is the
observation that the 10-YR Yields have broken out from an 11-year long falling trajectory. They
are seen heading towards testing 3.29-3.30 in coming months and while this happens, NIFTY
has enjoyed a positive correlation with the Yields since last 2-Years.

CONCLUSION:

To reach any fruitful conclusion, we have to look at larger time frame charts over shorter time
frame charts. Going by this, the Weekly US Dollar Charts show some weakness persisting in the
US Dollar Index and with this we may see positive impact on NIFTY given its negative
correlation. However, in the long term, when the Monthly Charts of US Dollar will dominate and
take over. US Dollar has very strong support at 86-86.55 area. If at all this is tested, we will see
the US Dollar Index rebounding from those area which is likely to have mild negative impact on
NIFTY. Currently, US Dollar is seen to have built a good base around 88 which is already having
a mild negative impact on NIFTY.

It is also important to analyze the impact of US 10-YR Yield and its correlation with NIFTY. It is
seen to have broken out from a long 11-year falling trajectory. Over last 2 years, its correlation
with NIFTY has turned positive. So long as they keep inching higher, it will continue to mitigate
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the negative impact that the rising Dollar Index might have on NIFTY.
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Overall, while the rising US 10-YR yields take a respite from inching higher, we might feel some
negative impact of the strengthening US Dollar over coming months. US Dollar Index in the
coming weeks might deliberate and get little jittery helping NIFTY in the immediate short term.
However, any meaningful rise in US Dollar Index over coming months will negatively impact the
NIFTY. However some of this negative impact might get mitigated with higher movement of
US10-YR yields.

(Milan Vaishnav, CMT, MSTA is Consultant Technical Analyst at Gemstone Equity

Research & Advisory Services, Vadodara. He can be reached at
milan.vaishnav@equityresearch.asia)

Milan Vaishnav, CMT, MSTA

Technical Analyst
(Research Analyst, SEBI Reg. No. INH000003341)
Member:
CMT Association (Formerly known as Market Technicians Association, (MTA), USA
Canadian Society of Technical Analysts, (CSTA), CANADA
Society of Technical Analysts (STA), UK
www.EquityResearch.asia
http://milan-vaishnav.blogspot.com

+91- 70164-32277 / +91-98250-16331

milan.vaishnav@equityresearch.asia
milanvaishnav@yahoo.com

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