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.
Using the standard weekly currency chart we followed along for months as the Euro found resistance at the long-term downtrend line as expected, the commodity currencies long ago lost major support and non-confirmed the commodity complex and the US dollar moved from a hold of critical support, to a trend line breakout, to its current impulsive and over bought status. It is time now for a closer look at Uncle Buck since this reserve currency is key to so many asset markets the world over.
As the charts below show, USD is over bought on both daily and weekly time frames. But the monthly is interesting because its big picture view is that of a basing/bottoming pattern, and it is bullish. That is a long-term director, so regardless of what happens in the short-term, a process of unwinding the hyper-inflationist ‘Dollar Collapse’ cult is ongoing. Signs point to disinflation toward deflation.
NFTRH has been bullish the USD and bearish the Euro, Canada dollar and Aussie dollar for quite some time now, most often using this simple weekly chart of various currencies. Months ago we noted USD creeping out of its downtrend (green dotted line) and the Euro falling out of its wedge (red dotted line). Back then, sentiment toward the USD was far different than it is today. So this week the Currency segment included some thoughts (and data) on USD and Euro sentiment as well.
Also of note, while the excerpt speculates that a USD reversal could trigger bounces in commodities and precious metals, these items generally remain bearish until proven otherwise. Not the other way around.
Now everyone knows the USD is bullish and the Euro is going to hell in a hand basket. As long as faith in paper currencies in general remains intact, I think that will be the trend. But USD is over bought to a degree that we could actually see a significant – if temporary – reversal of these trends.
“First, it is committed to experimenting even more with its use of unconventional monetary policy, including by taking the deposit rate even more negative and starting a program to purchase asset-backed securities.”
He lays out Draghi’s scheme pretty well. Read a good article by a smart man. But the problem in Europe is that the Euro strength they are trying to leverage was simply a counter trend reaction out of the first ‘acute’ phase of the Euro crisis in 2011. In essence, they are leveraging a 2 year Bear Flag (or Rising Wedge) in the Euro that always was likely to fail at the big trend line. Yeh, that should work well for Europe.
Oh but then there is Fortress America. Our currency is strong and our markets booming. Nothing wrong here! Well, we’ll see how long the ISM for example, stays strong with the USD becoming persistently strong.
Wasn’t the whole premise of the US recovery its ability to compromise Uncle Buck? I’d imagine that US stocks can go well higher on the old ‘King Dollar pulls in global liquidity’ play, but there is a shelf life here if Unc gets persistently strong with two drivers at his back; the Euro trash fest and US policy that could have its hand forced toward tightening sooner than maybe the majority now thinks.
As I wrote the other day, it is hard to know exactly what will play out when, but it sure is getting interesting.