Originally published by Chamber of Merchants
Dollar at Triple Top Cusp
Good morning everyone. The dollar is heading closer to the US Dollar Index 100.50 resistance zone. As you can see from the chart below, this is a pretty big deal. The chart is from the 90’s to present day and shows the path of the dollar since then. At this very moment, the dollar is deciding (or rather the market is) whether it will surpass the 100.50 mark and continue on a new bull run or whether it will finally capitulate and head back down into a longer term bear market. So this is a pretty big deal: All commodities will begin a bull run pricing trend if the US Dollar fails to hold this high.
If the dollar does break down and heads back to the long term bear line trend line then the next test in the next few months will be around 91 on the DXY. Please note that that each candle in the chart is a month, so no fireworks: this process takes time.
So probability wise, one can see that there is a strong probability for a reversal. In fact, economically the dollar could go up or down from here, depending on which factor is most potent.
For example, if the US economy is about to experience growth then investors may want to have a piece of the buy through the stock market or bond market, meaning they will transfer more funds into the US by converting to US dollars. Additionally tax reform for capital that US companies are keeping outside the US for tax purposes may start flowing back into the US, meaning a stronger US dollar.
On the other hand, and this is the camp I’m in, (rightly or wrongly so) if the US is about to print another trillion dollars worth of debt, it ultimately means a dilution of the US dollar as inflation is manufactured into the economy. This means that overseas market participants that hold US bonds will lose value in their investments. Additionally every dollar in the pocket becomes worth less and less. This means that the US dollar becomes less desirable and ultimately bonds and dollars will be given back to the US and the currency will continue to depreciate, regardless of “growth” since the growth is proportionally reflective of debt.
Uhm…. Let’s keep it simple though.
If I were China or Saudi Arabia, currently holding hundreds of billions of dollars of US bonds, now would be a perfect time to liquidate my bonds and extract the capital at the best exchange rate in months. If this happens, the US dollar rally has to come to an end imminently. Let’s keep our eyes on the bond market. While the sell-off has paused, it may be a day or two of calm before the fall. Who knows for sure ? Interesting none the less.
Some Interesting gold developments
Yesterday’s post discussed the support and resistance zones of gold. As the dollar stretches on its tippy toes to touch the top of its price channel, bets are piling up in gold that the dollar is about to reverse.
This is most evident in Direxion Daily Junior Gold Miners Bull 3X Shares (NYSE:JNUG), the US triple leveraged gold fund which rose 16% last night:
The VanEck Vectors Gold Miners (NYSE:GDX) also rose by 4.22% :
Conversely, the short selling pressure (bets that gold will go down) via the ProShares UltraShort Gold Miners (NYSE:GDXS) (Gold shorting fund) reduced by 7% :
As per chart above, there’s been quite a bit of short selling pressure building up. This fund will come under pressure very quickly in the event gold starts rallying. Keep your eye on GDXS. If it goes down then bets on a lower gold price are decreasing and vice versa.
Conclusion
No doubt, it’s a dollar and bond market story right now. All eyes on anything that influences the dollar and bond market.
I have noticed that there is an onslaught of Federal Reserve Members that have been speaking this week, while the market evaluates their every word to get a clue about the December rate hike.
You can always google “FOMC” and find the latest speech or interview. While the market has now priced in a rate hike probability of 91% (!) no FOMC member has actually said “Yes, we’re raising rates.”
Instead we hear rhetoric like, “It’s likely”, or “the case is good for rate hikes”, or “soon we will raise interest rates” or “interest rates should be raised soon” or, my favourite, ” a rate hike will be appropriate”.
My point? They’ve been saying this for years: It has always been appropriate, it has always been likely, but in the last few years they’ve actually only raised once at 0.25%.
It remains to be seen what will happen this December. I’m betting no rate hike. Although, if I’m wrong, then that rate hike will be the last one for at least a year since Janet Yellen, the FOMC chair, wants to run the economy “hot” (remember?).
How hot Yellen wants to get is to be seen. (That sentence may raise some eyebrows)