How much further will the Dollar decline?
FX:
Gold is on fire and the dollar is tanking this morning. But
you probably already knew that. Last week we closed out all our positions to
avoid year end volatility and make things simple for the accountants.
Recall that last Monday we said to look for a final rally in
“wave 1” to cap a “five wave” advance from the December lows at 89.50. The
dollar then broke below trendline support from those lows yesterday and we said
“The dollar still looks like it completed a “five wave” move and is in need of a
correction lower in “wave 2” before “wave 3″ up gets underway.” (See first two
charts below for the prediction and the forecasted pullback today – which is why
we stood aside yesterday).
The dollar index looks like a steep “wave 2” correction, and
part of the reason is the FOMC minutes out later today which may show a path to
the end of the rate hiking cycle. Recall that the December lows reached a nadir
on the Fed’s rewording of the announcement, but the dollar staged a dramatic
comeback. This may be some of the same “Buy the rumor, sell the fact” action.
BUT, the one monkey in the works is the euro. Readers may
recall our report from last week showing how the euro was looking much more
strong than out favorite dollar short candidates like CHF.
There is a very obvious downtrend resistance line crossing
overhead at 1.1970. A sideways move this week would be all it takes to break it.
We point this out because EUR makes up the bulk of the dollar index and would
therefore stand to alter our wave count.
So readers may recall that we were looking to reposition long
USD/CHF on the first real trading day of the year (today). But with the
possibility that EUR/USD breaches the key 1.20 level we must stand aside and
allow the market to show us what it wants to do.
Another interesting comment on this is that John Netto, our
friend, colleague and investment partner discussed with us last week that he was
buying out of the money call options on EUR/USD. His discussion of the rational
can be found
here.
When he presented his strategy to us last week we agreed that
a breach of 1.20 would likely lead to a flurry of buying making the ‘cheap’ out
of the money calls a good bet. If you are long USD and worried about that
exposure, one way to mitigate any further downside risk would be to follow Mr.
Netto’s lead.
That said, we are still looking to buy into any weakness in
the coming days in anticipation of a rally to our initial target level of
95/100. But the steep selloff this morning obviously makes us extremely cautious
and are therefore taking a seat and waiting for the minutes like the rest of the
market to see if we should step in and buy. Recall that we bought USD/CHF three
weeks ago at 1.2810 in the midst of the post-Fed dollar selloff. So today’s
action does not frighten us, it just warrants caution.
The bottom chart shows the same key level we were aware of
three weeks ago when we recommended buying USDX. We think a recovery to back
above the key 90.50 level this week would be the first sign that the dollar was
regaining its footing. Obviously A MOVE BELOW THE “KEY” LEVEL in chart 3 calls
for a much larger decline.
Gold’s ongoing rally is testament to the changing dynamics of
this market. We correctly called a top last year, but have struggled to feel
confident this year about ‘normal’ retracement targets. As we said last week, if
you are bullish on gold and are also holding long USD positions a good hedge
right now is to start scaling into long AUD/USD around 0.73 due to what we think
is the need for a strong bounce in Aussie. Last week we said we are going to
wait to buy in our target range in 0.7150/0.68 early this year. But if EUR/USD
breaks above 1.20 we think the most prudent course of action would be to buy AUD/USD
and then wait for the selloff in USD/CHF to end before jumping into long USD
positions again.
Stocks:
No change: Stocks are looking weaker and the “five wave” move
down we want to see is getting there. A major stock market top coincident with
an inverted yield curve should cause some concern from the bulls. Meanwhile,
global equity markets are in need of a correction as well after some of our
favorite markets made +40% in 2005.
Bonds:
No change: The corrective move in yields looks finished and as
we said yesterday, “with the yield curve inverting we think the Fed should try
to push the long end of the curve (with words of course) higher.”
A seemingly dumb move would be to act as if the yield curve
doesn’t matter. We wouldn’t put it past these guys to start saying this, and it
would only strike intelligent people as absurd considering the Fed came out with
a study after the 2000 market crash saying the surest sign of a recession was an
inverted yield curve.
Never believe the phrase, “This time its different.” As such
we’d counsel them to talk up long term rates instead of acting as if the
US/Global financial system is in perfect running order.
Regards,
Jes Black
FX Money Trends
613 4th St Suite 505
Hoboken, NJ 07030
Tel: 646.229.5401
www.fxmoneytrends.com
Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.
Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.
Jes
Black’s opinions are often featured in the Wall Street Journal, Barrons,
Financial Times and Reuters. He has also written numerous strategy pieces
for Futures magazine and regularly attends industry conferences to speak
about the currency markets.