US Dollar Versus Commodities

With the recent surge in the US dollar, commodities have been hammered lower--grains, gold, and oil.  [We shorted gold yesterday in a Flash Alert to our subscribers based on the chart setup we defined in our Key Market Strategies issue which you can find here. We have been short oil for the past few weeks based on our wave analysis.] 

Will dollar strength and commodities weakness continue?  We suspect so and believe the strength we are now seeing in the US dollar is corrective when place in the larger context.  When this run is over, and we can see it lasting through 2018 and into 2019 it will be time to short the dollar and load up on commodities--a long-term position trade. 

We were expecting an "inflation pop" this year.  But commodities are telling us otherwise at the moment.  Is it all trade related this fall in commodities, especially grains?  We don't know yet.  But the idea inflation is still quite dormant is the action in long bond yields relative to short rates.  In fact, we are expecting a rally in the 10-year Treasury Note -- you can see our view in Key Market Strategies with our coverage of TLT (20-year bond index ETF). 

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Jack Crooks, Black Swan Capital

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Donald’s Dollar Dilemma

Click here to view the PDF

Quotable

“Only those who will risk going too far can possibly find out how far one can go.”

--T. S. Eliot

Commentary & Analysis

Donald’s Dollar Dilemma

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 President Trump has made it clear he wants to see the US trade deficit decline and appears willing to use all means necessary to achieve his goal.

Global macro analysis has shown there is truth to the idea a weaker currency may be the best single policy tool to help alleviate a trade deficit; with lag time of course. But herein lies the dilemma for President Trump—a trade war, some type of global risk-off event, and implementations of policies that lead to relative US growth are likely factors what will lead to a stronger dollar; at least over the near-term—and thus delaying any likely improvement in the trade deficit; thus, potentially leading to more trade concerns, more risk, etc.

Historically, strong relative economic growth and yield, driving capital flow, have corresponded in a powerful feed-back loop to push said local currency higher against competitors.  Read More...

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EUR/USD vs. EU-US 10-year spread...hmm...tracking?

EUR/USD vs. EU-US 10-year spread...hmm...tracking?
5 June 2018/8:49 a.m. ET

Interestingly, we are seeing some positive correlation between the widening 10-year yield in the US over Europe; i.e. 10-year spread.  We believe this spread will continue to widen (purple line push lower) in the weeks ahead as the Fed will hike and Europe growth fades, along with rising political risk.  So, maybe some money flow out of the Euro and a dent to those structural long bets on the euro we continue to see in the open interest positioning data. 

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Positioning/Data Due Out/Chart View (AUD, EUR, 10-yr Note vs. $ Index)

Positioning/Data Due Out/Chart View (AUD, EUR, 10-yr Note vs. $ Index)
1 June 2018/7:41 a.m. ET

Position Link

 A slew of data due out today, including non-farm payrolls which bond traders (10-year chart and comments below) will likely react to, if not the currency guys...

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AUD/USD 240-min view:  Our risk on this trade is 0.7510; the 61.8% retrace is 0.7519; today's first pivot support comes in at 0.7527--needless to say we need to see Aussie turn in here or we will be stopped out.  Seems an appropriate place for a move higher and a rally in minor (c) of [c] toward our 0.7700 target.  We shall see.

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EUR/USD 240-min: Seems decent price action relative to the news here.  Despite the turmoil across Europe (Italy and Spain specifically) the seems well supported.  However, near-term resistance is 1.1730 and the pair turned down from that level yesterday.  So, we need to see a push through 1.1730 to have more confidence in our view. 

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10-year Note Futures versus US$ Index Daily: What is interesting here is the fact that higher yields (seen as lower 10-yr Note prices) have correlated to a "falling dollar."  It appears the bond spike we have seen is a bit extended.  So, if bonds fall on non-farm payroll this morning (yields rise), and this correlation holds, it would mean a weaker dollar.  This is why it has been so difficult for many moons to link fundamental analysis to currency trading; the traditional guide post of yield spread has not seemed to matter for a long time now.  That may change.  But hasn't yet. 

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