Is a Short-term US Dollar Correction Brewing?

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Sunday 17 Aug 2014


Not to get too philosophical here, but isn’t the bankruptcy of economic theory (the clinging to Keynesian dogma) espoused by those who make real policy another sign of the times—the cultural decadence of the West? 

“But what are the contents of the overarching culture?  By tracing in broad outline the evolution of art, science, religion, philosophy, and social thought during the last 500 years, I hope to show that during this span the peoples of the West offered the world a set of ideas and institutions not found earlier or elsewhere.  As already remarked, it has been a unity combined with enormous diversity: Borrowing widely from other lands, thriving on dissent and originality, the West has been the mongrel civilization par excellence.  But in spite of patchwork and conflict it has pursued characteristic purposes—that is its unity—and now these purposes, carried out to their utmost possibility, are bringing about its demise.  This ending is shown by the deadlocks of our time: for and against nationalism, for and against individualism, for and against the high arts, for and against strict morals and religious belief.

“The now full-blown individual wields a panoply of rights, including the right to do ‘his own thing’ without hindrance from authority.  And any right is owed to all that lives: illegal immigrants, school children, criminals, babies, plants, and animals.  This universal independence, achieved after many battles, is a distinctive feature of the West.  EMANCIPATION is one of the cultural themes of the era, perhaps the most characteristic of all.  And of course it requires more and more limitations in order to prevent my right from infringing yours. 

“…But why should the story come to an end?  It doesn’t of course, in the literal sense of the stoppage or total ruin.  All that is mean by Decadence is “falling off.”  It implies in those who live in such a time no loss of energy or talent or moral sense.  On the contrary, it is a very active time, full of deep concerns, but peculiarly restless, for it sees no clear lines of advance.  The loss it faces is that of Possibility.  The forms of art as of life seem exhausted; the stages of development have been run through.  Institutions function painfully.  Repetition and frustration are the intolerable result.  Boredom and fatigue are great historical forces.

“It will be asked, how does the historian know when Decadence sets in?  By the open confession of malaise, by the search in all direction for a new faith or faiths.  Dozens of cults have latterly arisen in the Christian West: Buddhism, Islam, Yoga, Transcendental Meditation, Dr. Moon’s Unification Church, and a large collection of others, some dedicated to group suicide.  To secular minds, the old ideals look outworn or hopeless and practical aims are made into creeds sustained by violent acts: fighting nuclear power, global warming, and abortion; saving from use the environment with its fauna and flora (‘Bring back the wolf’); promoting organic against processed foods, and proclaiming disaffection from science and technology.  The impulse to PRIMITIVISM animates all these negatives.

“Such causes serve to concentrate the desire for action in a stalled society; for in every town, country, nation, it is seen that most of what government sets out to do for the public good is resisted as soon as proposed.  Not two, but three or four groups, organized or impromptu, are ready with contrary reasons as sensible as those behind the project.  The upshot is a floating hostility to things as they are.  It inspires the repeated use of dismissive prefixes anti- and post- anti-art, post-modernism) and the promise to reinvent this or that institution.  The hope is that getting rid of what is will by itself generate new life.”

Jacques Barzun, From Dawn to Decadence: 500 years of Western Culture Life

Commentary & Analysis

Is a Short-term US Dollar Correction Brewing?

 Two primary reasons why it appears to me a US dollar “correction” of the multi-day or couple of week variety may be brewing:

1)      The setup for a rally in the Japanese yen as discussed in Currency Currents yesterday

2)      The technical picture shows momentum rolling over in the US dollar index

3)      Stocks appear near-term oversold and a rally there would likely support the pack of currencies against the dollar, i.e. some safe-haven relief

4)      And last but not least, I noticed the newsletter crowd turning bullish on the US dollar.   That is usually a decent contrary indicator, at least over the short- to intermediate-term.  [As you know I have been long-term dollar bullish for a while; beginning back in mid-2008.  You can read my rationales here.]


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A technical view of the US dollar index…

A)    In the chart above, the first thing you see are the red circles; that represents a simple crossover downward of the fast line below the slow line in the MACD indicator.  Simply making the point when we have seen that in the recent past, the US dollar index began, or was already in, a correction lower that was multi-week. 

B)    In the lower panel is the Relative Strength Index.  I have drawn a red dotted sloping line with shows the momentum is waning.  The theory is momentum moves before price.  Also, this also represents a bit of divergence as the RSI was falling as the price of the dollar index made a new high.

C)    Three-wave patterns, I think, best characterize the movement in the US dollar index—up and down.  I have numbered a series of three-wave patterns on the chart; we have seen a three wave pattern from the low back in early 2014. 

Drilling down closer on the same daily chart (below), I have drawn a trend channel and applied some retracement targets on the chart…the 50% level comes in at 80.76; then Fib support at 80.52 (61.8%).  FYI the correction of what I have labeled wave 1 to 2 in the current rally was bang on 61.8% at 79.75 back on July 10, 2014. 

Near-term negative correlation with stocks and positive correlation with US Treasury prices as the buck seems to be playing a safe haven role.  Remember, if someone wants to hide into US Treasuries that does not already hold US dollars, they have to buy US dollars in order to do that.   This supposed correlation isn’t exactly perfect, or really all that tight, but if stocks continue to rally some safe haven money will likely leave bonds (and the dollar) and go back into stocks.

 So, is the US dollar poised for a correction?  Time will tell as always.  But there is some evidence that tells me it is worth a bet. 

What are the risks to this trade idea, i.e. the dollar continuing on in a powerful rally?  Too numerous to name them all…but that is why we should trade with a stop-loss.  :)

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Jack Crooks

President, Black Swan Capital

Twitter: @bswancap