A real time view of the US dollar index by daily chart. Today the trend line support was just about hit. Lateral support resides at 94-95. RSI is not over sold, but it has dropped to and through levels where it bounced in the past. This is actually a negative on balance now that it is below 50 and is in a deeper correction than any since the rally started last spring and summer.
Here is a longer view that includes the rally’s beginning. Notice how the major trend line (as opposed to the short-term one above) intersects the lateral support cluster. That is what we’d call some nice confluence and I’d expect that pending interim bounces, Uncle Buck can make its way down there. But it remains bullish on a bigger picture.
Our pals at NFTRH.com noted the move in USD/EUR, with the FOMC acting as an accelerant to already likely short-term events. We, I mean they also babbled a bit about the gold miners.
But the following chart of hedged Europe fund HEDJ and three unhedged Euro items shows why I got rid of the way over crowded ‘currency hedged Europe’ trade. If a Euro bounce and USD drop were likely, that hedge no longer made sense.
Note HEDJ negative while EZU pops.
I currently hold the last two items in the panels below per ongoing analysis about European exporters (a big pharma and a diversified industrial/manufacturer). So far so good. Not sure yet if I am going to take these profits. I have to run, but need to think about the markets tonight (and I am sure NFTRH will have an update in the morning).
I’ll be the first to admit I’d have expected a correction in the US dollar by now. Don’t get me wrong, NFTRH was on the fledgling USD rally last summer when it was still considered by many to be just another beaten up combatant in the currency wars. But in thinking it had gone too far on over bullish sentiment, I was wrong in January. Indeed, as noted a couple weeks ago in NFTRH 331: “I continue to be proven wrong in expecting the US dollar to correct. Further, at this juncture the weekly chart pattern looks more like an over bought consolidation than a top.”
Moving on, the consolidation worked off the over bought situation by daily charts (weekly remains over bought) and today USD is making a new high.
As for the Euro, the monthly works best to see where this thing may be headed. As noted in NFTRH 332: “Euro has failed to bounce by shorter-term charts and so the monthly is back in play with the lower channel line beckoning.”
With Uncle Buck’s break upward, this still looks to be the case.
There are many funny stories out about disinflation these days. The meme has gotten amazing momentum, even more than it usually does at this time of year (see my post last month, “Seasonal Allergies“). One of the most amusing has been the idea that the decision by the Bank of Japan to greatly increase its quantitative easing would be disinflationary in the U.S., because the yen would decline so sharply against the dollar, and dollar strength is generally assumed to be disinflationary.
The misunderstanding of the dollar effect is amazing, considering how easy it is to disprove. Sure, I understand the alarm at the dollar’s recent robust strength. Of course, such a large and rapid move must be disinflationary, right? Because who could forget the inflationary spiral of 2002-2008 in this country, when the value of the dollar fell 25%?
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[ed: I thought I’d post this here as well as NFTRH.com, since it is commentary based]
Excerpted from the November 2 edition of Notes From the Rabbit Hole, NFTRH 315. Public readers please filter with the idea that the style of writing meshes with much of what was included in the report that preceded it and hence, maybe appear to be a little vague in some areas.
Currencies & Commentary
In light of the news from the land of the rising sun and the sinking currency, let’s reserve NFTRH 315’s only real charting for a big picture monthly view of currencies, to which we usually give just a brief update, and then some misc. big picture monthly charts [not included in this excerpt] as we try to gain perspective on things that may seem illogical to our rational minds.
Yen is losing the next level of support. BoJ saw that support too. I’ll bet they also took note of the big October bounce and found it unacceptable.
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Using Tom McCellan’s article discussing a “blow off” move in the US dollar and its very bearish net short position by commercial traders as a starting point, I would like to talk about the USD and gold and how they each fit in to the global macro backdrop. We could add silver into the mix as well because its failure in relation to gold (ref. the gold-silver ratio’s breakout last week) is the other horseman (joining Uncle Buck) that would indicate a changing macro. Here’s the McClellan piece:
First I would question the term “blow off” when talking about the USD. Markets that have come off of long term basing patterns and broken above resistance with plenty of overhead resistance still to come have not blown off. A blow off is Nasdaq 2000, Uranium 2007, Crude Oil 2008, Silver 2011, etc.
This is the standard Currency chart we use in NFTRH almost every week. Sometimes we dial in to dailies or out to monthlies, but this weekly snapshot has been pretty good at keeping an ongoing summary of events, which have been… USD bullish, Euro bearish, Canada and Aussie bearish for quite some time (and foreshadowing the coming commodity wipe out well in advance) and British Pound waffling but mostly bearish.
The Yen is not included because it is featured each week as part of a mirror image chart with the Nikkei in the Global Stock Markets segment.
People should try to get their heads out of their ass(et) classes and look at the signals that these assets may be sending. Look, gold bugs are screwed and being run up the analytical flagpole as outdated anachronisms and stuffy old fogies with outmoded views. The stock market has proven bullish again and again and policy making has worked swimmingly for a couple years now.
So take out the gold bug, the silver bug, the commodity and inflation bug and the stock market bull and/or bear and just look at the signals. The Gold-Silver ratio (GSR) is rising strongly and it is happening in unison with the now well bull horned US dollar, which everyone left for dead just a few months ago *. The question that should be asked now is not ‘how do I defend my stance?’ or ‘what asset should I buy or sell?’ but rather, ‘what does this mean from a macro market view?’
The correlation by daily view of the GLD/SLV and UUP ETFs is not very good, but over a longer-term is GSR and USD are generally in line. We have always felt that the USD (a global asset anti-market or counter party) is a bedfellow of the gold-silver ratio (a risk off/illiquidity indicator).
More to come on this in the form an NFTRH excerpt later on. But we should be beyond hoping that this or that asset class will go up and into a time of evaluating what, if any meanings can be taken from the USD-GSR relationship. A lot of people are interpreting the rise of the USD as a bullish event, with only gold and commodities to suffer. They had better do the work to confirm that view rather than just making assumptions.
* Not by me and not by my market management service. We charted its hold of important support and casually followed its progress every single week. Now Uncle Buck is all lit up in neon and as usual, a majority is now aboard the story and promoting distortions.
One currency that has resisted the power and authority of Uncle Buck is unsurprisingly the one that denominates a relatively sound and stable financial economy; that of Singapore. It looks like USD is in a bearish Symmetrical Triangle in SGD. Just poking around the cool dynamic charts at Freestockcharts.com (linked on the right side bar) when I found this.