10/12/2014: Settled markets ready to take the US lead again

Although there were early hints during the Asian and European session, yesterday’s big move against the dollar came as the US traders came in and took a bearish view on the markets. The flight into safe haven assets was significant and saw a large selling of the dollar and equities at the expense of gold, US Treasuries and the yen. However the trading in the market this morning, suggests that this move has settled. Could this mean that yesterday was a one off, a blip that whilst should not be ignored, can be looked past? I believe so.

dollar positive

I have been talking about dollar strength for a while. The US economy seems to be almost out on its own in terms of improvement, as other key economic zones of the world continue to deteriorate. The Eurozone, China and Japan are all deteriorating (Chinese inflation fell further and missed expectations again this morning). However the US smashed expectations on its Non-farm Payrolls last week whilst also posting solid wage growth (which suggests that that build blocks of inflation are being steadily laid). This should drive for an increasingly hawkish Federal Reserve and the divergence of central bank monetary policy.

I was long and wrong the dollar yesterday, in that I was caught long Dollar/Yen and short gold. I got duly punished on my two positions that I had open (fortunately all my previous long dollar trades had already hit their profit targets and had been closed). However I do not believe that what happened yesterday means that I am wrong. I still believe that being long the US dollar will prevail in due course.

That means as a general rule I would prefer to be short on EUR/USD, GBP/USD, AUD/USD, NZD/USD. The euro and Cable maintain their strong downtrends, whilst the multi-year downside breaks on the Aussie and Kiwi are compelling for further weakness. I would also prefer to be long on USD/JPY, USD/CAD and USD/CHF, with recent corrections not yet making lasting damage to the bullish longer term outlook. Clearly as with everything in technical analysis, there is an element of timing with each of these trades, but I believe that my strategy of trading with a positive dollar bias continues to be correct.

The chart below shows the performance of each of the majors relative to the US dollar since the beginning ot November. You will notice that each major currency is underperforming the Dollar Index (a basket of major currencies) except for Gold and Silver (which have just spiked up above the 0 line in the past couple of days. The biggest underperformer is the yen (bold white) which despite yesterday’s sharp rally for the yen continues to languish well down. This is followed closely by the Aussie dollar (dark orange).

Dollar relative

My views on gold are slightly different. There is a degree of uncertainty for the outlook of gold currently as there are significantly contrasting views from a short term rally within a medium/long term bear market. I am fairly certain that I am happy to be a seller of gold whilst the price trades below the key reaction high from October at $1255.20, however I cannot deny that the near term rebound has been strong, whilst the gold price has not been entirely trading along the lines of a negative correlation with the dollar in recent weeks.

Leave a Reply

Your email address will not be published. Required fields are marked *