Why I continue to take a cautious approach to the dollar
An earthquake in Mexico city today
saw the peso rally to new 3-month highs, which must have dislodged
Luis Obrador enough to encourage the markets.
Recall that yesterday we decided to purchase USDCHF to offset
just 1/4 of our short USD position via AUD and MEX. We bought at 1.2350 and
moved trailing stops to 1.2400 and hope to close around 1.2430/50 today.
The reason is that 1.2450 holds enough resistance that we’d
like to see how the market reacts around these levels. The euro is still the
main wildcard and a move below 1.27 could see a swift correction back to 1.25.
However, failure to do this could see a rally above 1.29 which would ignite
further gains to 1.30/31 over the coming days to weeks.
With that in mind we continue to take a cautious approach to
the dollar by maintaining a hedged position. Our long AUDUSD and MEXUSD fared
very well during the last 24 hr period of dollar strength and we continue to
hold a very positive attitude to key commodity currencies.
Below we still see the euro as being in a larger “wave 5 of B
of IV” type consolidation pattern. This means a final run at 1.30/32 should then
see a reversal back to 1.24/25.
No change in the dollar index: The dollar index broke below
trendline support from the choppy advance since the May lows which we said to
buy and have since taken profits from. As we said last week, “We think a move
below 1.23 in USDCHF and we think that the chart pattern suggests a move down to
1.18/1.17 is in order. A break below 85 in USDX has confirmed a near term
bearish scenario.”
Gold: Gold continues to trend sideways in what may be in “wave
C,” down or a larger consolidation pattern. At this point it is not clear.
What is clear is that another pullback in gold will offer
another great opportunity to position long since our call to buy near the
support zone at $540/$580.
Recall that while wave C down may be underway, we view this as
another opportunity to position long (similar to our view when “wave A” ended).
This is because we expect the correction from $730 to end the larger “wave II”
pullback followed by a soaring “wave III” rally.
As we have said for months now, “In the broader picture, this
long awaited correction is underway and recall that a top here at $720 will mark
the end of “wave 1 of V” meaning a pullback to $580/540 would be “wave 2 of V”
followed by an explosive rally in “wave 3 of V” to new all time highs.”
Stocks: This market is trendless between the 1,250 and 1,290
levels. Only a move below or above would give us a good clue as to its future
direction.
Recall that last week we warned that a move above downtrend
resistance at 1280 would be near term bullish. Prices have since stalled at
1,290. We are more inclined to go short from the 1,330 level and add to that
upon a break below the 1,240 lows.
As we have said time and again, “The market is extremely
optimistic that a peak in the Fed cycle will see a lower dollar and higher
stocks. Unfortunately, history says the exact opposite.”
Bonds: No change: Our bond forecast has been impecable, as we
have called each of the little twists and turns and pivot points. Since prices
have effectively pushed through channel resistance crossing at 105.50, just as
we forecasted, this suggests that a larger rebound is underway.
We continue to see a rally to 107/109 followed by a renewed
delcine below 104. The reason is that 104 will be a tough nut to crack the first
time around and the majority of players are already extremely bearish on bonds.
Crude Oil: Key to the near term bullish case is the trendline
support from February. As long as prices remain above here the pullback from our
technical target at $78/$80 can be viewed as a correction. Traders are still
encouraged to take initial profits at the $78/$82 range and to now tighten up
remaining stops. If we do get a spike, a move to $90/$100 would be were we look
to cover and possibly reverse.
Recommended long at $55 last November. Still looking for a
move to $80-$100 over the coming months.
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.