Guest Post by Capitalist Exploits
A bull market in the US Dollar is underway and its magnitude and duration are likely to catch everyone by surprise. I believe it isn’t out of the question for the USD Index to advance by at least 50% within the next 5 years. If this forecast proves correct, there will be profound ramifications for the global economy and many financial markets, particularly emerging markets.
The Dollar Index has advanced by about 10% in the last 6 months, which is quite a sizeable move. However, if one takes a long-term view this isn’t a large move. What I am interested in is the USD trading sideways for the last 7 years. Usually when a market has been locked in a trading range for a long period of time a breakout to the upside signals the start of a long-term bull trend.
Note the long-term chart of the Dollar Index below – the bull markets in the early 1980s and late 1990s occurred after long periods of sideways movements. After some 7 years of “oscillating” around the 80 level it is about due for an extended period of upward movement. This isn’t hard to work out. It is the “collateral damage” of an extended bull market in the dollar that will be difficult to estimate!
Guest Post by Michael Ashton
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%?
Today the 2 Horsemen rode newly brave bulls back out of town.
As crude oil continues down today we are presented with a perfect opportunity to review why gold mining fundamentals can IMPROVE in a rising US dollar atmosphere. So many people run the equation through their heads: USD Strong = Run Away!
Since we noted a couple weeks ago that the TIP fund was trying to put in a short-term bottom, it ground around but continued upward. Of course, with the smell of risk ‘off’ in the air, TLT has gone up even better lately.
What I find pretty cool is the inverse nature of TIP-TLT and USD (UUP) in the lower panels. We are still on the potential ‘inflation trade’ (anti-USD) bounce theme but it is safe to say that for it to get going, TIP-TLT would need start climbing. I have some TIP and STIP to go along with SHY as part of my ‘cash equiv.’ but think of it more as an indicator.
The news driven short covering rally yesterday was impressive and now momo’s are being punished. Makes sense.
Well, today the expected reversal in USD is firming up as the big down day on Monday gets some follow through.
There is nothing much to add to all of the bounce candidates we have been talking about in energy, uranium, commodities and yes, the precious metals. Also, the stock market is getting a direct helping hand from the dollar’s reversal.
We will track the nature of things daily if needed, and on the weekends of course. Just remember the difference between bounce and bull. Frankly, I have a few endorphins feeling pretty good right now and that is exactly the reason I am going to keep my thinking cap screwed on really tight!
We will stop labeling this as a “bounce” or counter trend rally only when the technicals and macro fundamentals indicate as much.
Today is the kind of day when you’d do well to tune out any cartoon characters ranting about any sort of manipulation. The simple fact is that the 2 Horsemen, the gold-silver ratio and the US dollar (GLD-SLV & UUP) are riding together today in opposition to most asset markets. Period.
Guest Post by Steve Saville
Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 5th October 2014.
As long as a market is in a strong rising trend almost any bullish argument could appear to have a ring of truth about it, even a completely baseless one. A case in point is the deluge of baseless, bullish-slanted US$ analyses prompted by the strong rise of the past few months in the Dollar Index.
Excerpted from this week’s NFTRH 311 (10.5.14)…
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:
Commercials Betting on Big Dollar Downturn
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.
Guest Post by Tom McClellan
October 04, 2014
The U.S. Dollar Index has recently been in one of the biggest blowoff moves we have seen in years. The lesson of the past blowoffs is that the downward slope out of the eventual top tends to symmetrically match the slope of the advance up into it.
This week’s chart shows us that the commercial traders of various currency futures contracts are already making a huge bet on a dollar decline. The indicator in the chart is one that I created several years ago by combining the commercial traders’ net position in multiple currency futures contracts into a single indicator. It does not include all of the currency related contracts which are now featured in the most recent Commitment of Traders (COT) reports, because they do not all have the same lengthy and consistent history of reporting. This indicator combines the commercials’ net position in the euro, yen, pound, Mexican peso, Swiss franc, Canadian dollar, and US Dollar Index futures, each weighted according to the dollar value of each position.