Which horse to ride: Plausible competing US dollar views....

We have two seemingly equally plausible views for the direction of the US dollar; i.e. key juncture time we suspect.

Comdols appear relatively cheap, but no doubt would suffer on a big “risk off” event. The euro and yen (plus swiss) have been playing have roles, yet that could change quickly, at least for the euro; though it makes sense for the yen to continue to appreciate from a haven standpoint.

But, the fact is the dollar has been grinding around with little in the way of pack correlation; i.e. some days euro strong and comdols weak. Some days euro strong and comdols strong. You get the point. So, maybe the play is to pair commodity currencies against the euro if you believe the dollar index grinds higher?

As you can see, our thinking is all over the board. Solidly on the fence we are with a slight nod to our primary view—the US dollar goes higher; but confidence is low. If we through out the fancy technical stuff, and return to basics, one can see in the first chart below the dollar index has for the most part been putting in higher highs and higher lows. The is positive price action despite the grind.

So, which horse to ride?

  1. Primary - The dollar rallies on growth and yield differential and quite possibly gets a major “risk bid” should stocks fall out of bed, so to speak.

081619 dollar index primary.png

2. Alternative - Maybe the Fed starts cutting rates much faster than Mr. Market expects, signalling zero-bound is in the cards, quickly denting the dollar’s relative yield advantage, and/or Mr. Trump decides he wants the Treasury to start intervening in the FX market, selling the dollar (But does he really want euro? Thus, yen the likely play here.) This may be enough to tank the US dollar suggesting a major top is in place.

081619 dollar index alt.png


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GBP/USD Daily: Boris shall set you free...

30 July 2019/10:37 a.m. ET

As you probably know, I am no fan of the EU.  So, by extension, I am routing for Boris to succeed.  And I believe he will succeed in successfully taken the UK out of the EU and the country will be many times better off as a result once we get this period of relative chaos.  

This is a piece I wrote back on June 22, 2016: Why Stay UK?  A taste below...

“Given that the aim of the European Union is to eliminate democracy by reversing the result, as perceived by the European Union, of the Second World War—supposedly a victory for the sadly mythical ‘Anglo-Saxon model’—it is not surprising that Britain is a primary target and that the EU nomenklatura—and indeed the global nomenklatura— is so desperate to retain control over it. The ultimate intention is to establish anti-democratic rule, and the ‘Rhenish’ model of crony capitalism, globally. But Britain has been the low-hanging fruit. That is why it is so important for the world for Britain to be allowed to regain its freedom and to re-establish democracy.”
 
Bernard Connolly, 
Don’t Trust the European Union, International Economy
 
Whether you like him or not, and I do, 
Nigel Farage nails it once again in this clip from the European Parliament as he expounds on the dangers and failures of the EU—the look on the faces of German President Merkel and French President Holland are priceless...

My view hasn't changed. Watching the machinations of the power elites (mostly remainders), I believe my view has been clearly validated. 

Another piece I saw in Chronicles magazine yesterday, was very bullish on Boris: Boris Johnson's blood sports.  A summary...

“The washing of the spears,” was the Zulu term for victory in battle. The latest phase in the Tory civil war has seen a brutal triumph of the Brexiteers, with no quarter extended to the vanquished. Of Theresa May’s Cabinet of 23, 16 have fallen as in an Elizabethan Revenge tragedy. It turns out that Boris Johnson’s favourite movie scene was the multiple killings at the end of The Godfather, and “carnage” was the verdict of Matthew Parris, the star columnist of the Times, reflecting the Remainers’ anguish.

I share those two pieces as background for my view the British pound is EXTREMELY undervalued should Boris succeed.  So, once we get through this near-term turmoil, and if Boris proves successful, we want to own all the British pound we can afford (leverage).  :)  This timing should coincide nicely with our intermediate-term view of the US dollar topping in early 2020 and setting up for a major bear market. 

For now, we are targeting down toward 1.1700 in the pound and suspect the Brexit low near 1.1400 is the bottom. 

073019 gbp daily.png

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Gold and the Dollar: Correction time?

Double equality target in gold? Say what? Looking at these moves as a series of three-wave corrections higher, we see that larger Wave (A) = (C) and minor Wave [a] = [c]…hmmm….due for a rest? Could coincide with another short-term bottom in the US dollar….(second chart below)….

071919 gold daily.png

US Dollar Index: A push down toward are target...correction complete?
19 July 2019/11:46 a.m. ET

A few days ago we shared this view, targeting down toward 96.60 to complete minor Wave [ii] correction in three waves.  Well, we got to 96.67 for the low and have rallied since then.  Thus, this is part and parcel to our trades today.  Based on our intermediate-term view; and if this is a completed correction, the dollar is poised for a sharp rally.  

071919 dollar index.png


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Comments on FX Intervention and the US dollar

Comments on FX Intervention and the US dollar:

We have heard from Fed Chair Powell. Accordingly, he seems to have signaled a rate cut at the next meeting is baked in the cake. And we should suspect it is already baked in the price of key asset classes and the FX pack.

But what is interesting is the background stuff; as usual. We have President Trump Tweeting about currency manipulation from both China and Europe. Explicitly we know China controls its currency, implicitly many suspect Europe (through ECB largess) does. We posted a story in the Members area from Bloomberg, suggesting bank analysts are starting to seriously consider a US intervention in attempt to weaken the US dollar. But, the key point is if no other central banks get in the game, i.e. it lacks any coordinated policy effort, any US intervention will likely fail. The market is just too big for even the world's defacto central bank to move its currency for more than a very short period of time.

Former Treasury Secretary Robert Rubin understood the currency game well; cutting his teeth as a trader at...wait for it....wait...Goldman Sachs (the firm that controls the world. :)) Rubin knew the market for FX was deep and liquid and interventions usually failed if not coordinated in a big way. Additionally, Rubin understood if a government wanted to intervene, the chances of success were much greater if said government waited for the currency to already have turned, or market sentiment suspected the currency already changed trend. It became known in the FX world as the "Rubin Rule" of intervention.

Fast forward to the Trump administration and the current global milieu. Global policy cooperation is close to non-existent and the US dollar (aka the Dollar Smile framework) is extremely competitive; i.e. the US economy is growing faster (it seems) and has a higher relative yield than its competitors. This is not the raw material of a successful intervention; it is the raw material for a fundamentally driven intermediate-term rally. And in fact, given the odds of failure, any attempt may lead to a big US dollar rally as the market loads up on dollars given away by the US Treasury.

If we add to this, the rising probability of yet more easing from the European Central Bank (ECB), the stage may be set for a big dollar rally as some worry about dollar weakness. Just the type of thing Mr. Market likes to see.

Link to Dollar Smile Framework: https://gallery.mailchimp.com/119a6a11c17b827a8c300117e/files/f3417d00-0782-4884-928d-c532c7465dbc/070619_Dollar_Index_View.pdf

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