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The Dollar Shakes, But will it Break?

Marc To Market's picture




 

The constructive outlook for the US dollar was predicated on two beliefs. First that growth and interest rate differentials favored the US over the euro area and Japan. Second that this would be the key driver in the foreign exchange market.

 

The nearly 3% contraction of the US economy in Q1 (at an annualized pace) is simply shocking. It has shaken the faith. The US 10-year bond yield fell back under the downtrend line drawn off the January and June highs.

 

This news was followed by disappointing consumption data (contraction in real terms for the second consecutive month in May). Some economists revised down their estimates for Q2 GDP and some even talked of the probability that with more than 2/3 of the economy contracting for 2/3 of the second quarter, the entire economy probably contracted.

 

The decline in the US 10-year yield did seem to be a critical factor behind the dollar's fall below its 200-day moving average against the yen on a weekly basis, for the first time in more than a year and a half,  but monetary policy is still diverging. The BOJ is buying two times the amount of assets the Federal Reserve will until August when it will be buying nearly three times more. Moreover, the Japanese economy is about a third of the size of the US (on both nominal and PPP terms, according to IMF data).

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Similarly, the ECB has just cut its deposit rate to zero and warned investors its balance sheet may expanded by as much as 400 bln euros by the of the year (assuming full take down of the TLTROs) The euro has shown itself to be fairly resilient and finished last week in the upper end of its recent trading range.

 

The euro is close its best level since Draghi announced the ECB's new initiatives (just shy of $1.3680). The 200-day moving average comes in near there and does the top of the Bollinger Band. The 5-day moving average is above the 20-day average. The RSI is neutral, though the MACDs have turned up. The record low volatility means that sustained upticks may still be hard to come by. The $1.3735 area may be the most that can be reasonably hoped for ahead of the ECB meeting and US jobs data (Thursday, July 3rd for each as the US Independence Day brings forward by a day the employment report). Above there, $1.3800 may prove formidable and, if it is approached, look for official rhetoric to be dialed back up.

 

Just as telling of the deterioration of the dollar's tone is the heaviness of the Dollar Index. Important technical support is seen between 79.70-80.00. A break of this would signal losses toward 79.00.  The 200-day moving average, just below 80.30, offers initial resistance.

 

Although the Dollar Index is mostly the euro and currencies that move within its orbit, a little more than a fifth of is accounted for by the Japanese yen and Canadian dollar. They were two of the strongest major currencies last week, appreciating about 0.65% and 0.85% against the greenback respectively. Indeed, this quarter the Canadian dollar is the strongest, advancing 3.6% and the yen is in third place with a 1.8% gain (after sterling’s 2.25% rise).

 

The technical indicators for dollar-yen, like the RSI and MACDs are not generating particularly strong signals, but the break of the 200-day moving average (~JPY101.70) is notable, and if it sustained in the coming days, more yen shorts might be forced to cover. The dollar also finished the week just below the lower Bollinger Band (~JPY101.44). While the JPY101.00 may offer some support, the May low was set closer to JPY100.80 and the year's low has, thus far, been set just below there in early February.

 

The Canadian dollar has been on a run since early June. On June 5, the US dollar was testing CAD1.0960, and it is now testing support near CAD1.0650. It is below its 200-day moving average for the first time since the Q3 13-Q1 13 period. The recent CPI and retail sales reports provided extra fundamental impetus behind the move that was already underway. The next level of support is seen near CAD1.06, which was a congestion area last December and into early January. The market is a bit over-extended, and that support area may not be easily violated on the first attempts.

 

Sterling is looking a bit tired, and BOE Governor Carney is giving investors indigestion. Still, investors believe that the BOE will be the first of the G7 to hike rates and the market still appears to be more inclined to buy dips. Initial support is seen in the $1.6950 area and then $1.6900-20. It may require a break of the $1.6850 area to spur talk of a top in the $1.7050-60 area.

 

The Australian dollar seems stuck around $0.9400. Support is seen in the band between $0.9350 and $0.9370. The RBA can be expected to try some more jawboning at the policy meeting next week, but clearly it has marginal impact at best. On the other hand, weak retail sales data may provide fodder for those who are not convinced that Australia will make the transition away from mining very smoothly, especially, with the tightening of fiscal policy.

 

The Mexican peso is particularly interesting from a technical point of view. The dollar appears to have carved out a head and shoulders pattern this month, and it finished last week at the neckline (~MXN12.9660). The head was formed by the spike to MXN13.12 on June 17-18. A convincing break of the MXN12.96 area would project dollar losses back toward MXN12.80.

 

Ahead of expectations for another 200k rise in non-farm payrolls, it may be difficult to justify a move below the 2.50% level in the 10-year US Treasury. Some consolidation is likely ahead of the report, with the downtrend line capping the upticks in the 2.56%-2.58% area.

 

Observations from the speculative positioning in the futures market:

 

1.  Position adjustment in the reporting period ending June 24 were mostly minor.  Only the gross short Canadian dollar positions were adjusted by more than 10k contacts and just barely at that.  Some 10.2k short contracts were bought back, leaving a still substantial 45.9k contracts.  At the same time, gross longs rose by 6k contracts to 40.6k, which is the largest of the year.  The gross short position of 5.3k contracts ist the smallest since last October.  

 

2.  The net long Swiss franc position swung back to the short side (5.4k contracts).  This was a reflection of 6.2k contract reduction of gross long positions to 9.1k contracts, and the addition of 2.7k short contracts to 14.4k.  

 

3.  The euro, Australian dollar and Canadian dollar futures saw a similar pattern of speculators adding to longs and reducing shorts.  The yen and peso saw both long and shorts reduced.  Sterling and the franc saw longs cut and shorts grown.  

 

4.  The net short speculative position in the 10-year Treasury futures fell to 27.3k contracts from 85.8k in the previous week.  The longs were feeling their oats and this was before the GDP shocker.  They added 37k contracts  to 402.7k.  The shorts may have gotten nervous and cut 21.5k contracts (to 430k). 

 

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Sun, 06/29/2014 - 09:36 | 4906882 merchantratereview
merchantratereview's picture

Will it break? He dunno.

Sun, 06/29/2014 - 09:09 | 4906857 dizzyfingers
dizzyfingers's picture

Banksters have their war so they're happy. Hide your kids and grandkids. All war everywhere all the time from now on?

Sun, 06/29/2014 - 07:34 | 4906765 AdvancingTime
AdvancingTime's picture

The games central bankers are playing in supporting their and other currencies has reached a dangerous level, we may be in the "red zone". Currencies are important chips in the commerce of government and the business of running a country.

History has shown that in the past both leaders and governments have fallen with the demise of their coin. If people lose faith in the system it could just come crashing down around our ears. At a time when billions of dollars can be traded in just the blink of an eye imagine how fast things could go to hell. More on this subject in the article below.

http://brucewilds.blogspot.com/2013/01/currencies-games-in-danger-zone.h...

Sat, 06/28/2014 - 20:25 | 4906185 Who was that ma...
Who was that masked man's picture

Bottom line?

The dollar is toast, burnt toast.

And so are we.

Sat, 06/28/2014 - 22:00 | 4906328 Michigander
Michigander's picture

I've got LOTS of silver jelly for that burnt toast!

Sat, 06/28/2014 - 23:02 | 4906419 willwork4food
willwork4food's picture

Grats Mich, but not to get morbid do you have LOTS of guns and LOTS of ammo for those guns?

Sun, 06/29/2014 - 12:40 | 4907168 Michigander
Michigander's picture

Not alot by hopefully enough. (3) 9 MM'S AND 2,000 ROUNDS OF AMMO.

Besides I can always call the police. LOL

Sun, 06/29/2014 - 06:12 | 4906711 hootowl
hootowl's picture

.....and food, medicine, water, clothing, transportation, untraceable communications, and an underground, drone-safe, place to hide?

Sat, 06/28/2014 - 18:45 | 4906024 crazytechnician
crazytechnician's picture

.

.
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It is a mathematical certainty that all Ponzi schemes end.

It is a mathematical uncertainty as to the timing.

Within the last 5000 years the historical average lifespan of a fiat currency is around 27 years.

You do the math.

 

 

Sun, 06/29/2014 - 07:36 | 4906768 AdvancingTime
AdvancingTime's picture

We  are all interconnected for better or worse. A bad apple can spoil the whole basket. Welcome to the world our leaders have designed or allowed to form. Whether by design or merely as a byproduct of globalization we have weaved a web of financial transactions that circle the globe. Over the last several years as money was printed by the central Banks it was not contained in the countries where in was printed.

This money flowed across borders influencing and distorting markets and prices across the world. Some people have been calling for a "world currency" for years. the saying "one should never let a good crisis go to waste" means that a meltdown with high levels of fear would present a perfect opportunity and catalyst to advance this agenda down the field. Remember many people with agendas have a lot to gain when a major shift in the currency markets takes place. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/02/contagion-may-lead-to-new-world-c...


Sun, 06/29/2014 - 08:03 | 4906778 crazytechnician
crazytechnician's picture

Yeah , Bitcoin.

Sat, 06/28/2014 - 19:53 | 4906125 Seasmoke
Seasmoke's picture

Are we at 100. Or 42 ???? But I guess, Either number is OVER 27. 

Sat, 06/28/2014 - 16:38 | 4905809 Chupacabra-322
Chupacabra-322's picture

The Global Criminal Religious Oligarch Cabal Bankster Intelligence Crime Syndicate will continue to Print for ever how long it takes to keep the illusion to the Sheeple that all is fine.

Sat, 06/28/2014 - 16:10 | 4905764 disabledvet
disabledvet's picture

never thought i'd say this but "that cheap dollar is a war crime." That puts a bid in every asset class imaginable.

If it's American.

Equities, treasuries, real estate...incredibly the Government keeps offering taz breaks to people who not only don't hire but in fact outsource!

"Apparently that dollar is still not worthless enough."!!!

Joking aside...the taper is for real...you short even the dollar at your own risk too. The only program left from the Plunge Protection Team days is HAMP...which has been a catastrophic failure.

Ironic because the other ones worked pretty darn well by and large.

Sat, 06/28/2014 - 16:00 | 4905737 kchrisc
kchrisc's picture

The fat lady just finished here second aria.

Sat, 06/28/2014 - 14:47 | 4905609 TVP
TVP's picture

If the dollar goes, they all go.  

And one day soon it will, whether it's due to a natural disaster or HAARP, massive false flag or genuine terrorist attack, or the bursting of one aspect of the tri-fecta Fed bubble-fuck (US equities, US bonds, and the dollar itself).

And if the dollar goes first, the chaos will be incomprehensible.  

Considering the motto, "order out of chaos"...well, you do the math.  

Sun, 06/29/2014 - 13:38 | 4907314 Grouchy Marx
Grouchy Marx's picture

No, they don't all go. The yuan and ruble will survive, and the yuan is on track to become the reserve currency. 

Sure there will be havoc, but some will come through it all on top.

International trade will be crushed, but it will rebound and continue. 

 

Sat, 06/28/2014 - 19:35 | 4906105 El Vaquero
El Vaquero's picture

There is a limit to the size of an empire without cheap oil fueling it.  You can only control what you can patrol.  I don't give a fuck if there is a massive NWO conspiracy or not because the days of cheap oil are behind us.  Physics trumps finance every single time they are brought into conflict.

Sun, 06/29/2014 - 06:17 | 4906714 hootowl
hootowl's picture

Do developments in natural gas, hydrogen, electric, thorium generation, or solar power factor into your thesis?

Sun, 06/29/2014 - 11:51 | 4907077 El Vaquero
El Vaquero's picture

Liquid fuels are what we need.  Natural gas is a limited resource and has storage issues when it comes to using it to transport things long distances.  Hydrogen has storage issues.  Electricity does not lend itself to extended mobility and electric cars and trucks will not scale up to meet the worlds needs even if it did.  Thorium could work for electricity generation and even manufacturing liquid fuels, but we should have developed that technology a decade or three ago and have already been putting the infrastructure in place.  It is too late for it to save our current incarnation of civilization, plus I don't see it working for 7 billion people.  Thinking of solar as anything but supplemental is a pipe dream.  All "renewables" are only as renewable as the equipment used to harvest them. 

 

Just remember, the ability to pull up to a pump and pump 20 gallons of liquid fuel in 5 minutes is what has given us unprecedented mobility.  Fuels in gas (H2 and CH4 primarily)  form will either give you limited range, or limited efficiency due to how they are stored.  Using electricity means limited places you can go, such as electric trains, or limited range and limited scalability.  There aren't that many lithium sources on this planet, and the most dense storage technology for electricity requires lithium.  And it sucks when put next to gasoline or diesel. 

 

You are not going to support the large metropolises of today without the unprecedented mobility that we have had in recent history.  Food and clothing must be transported long distances and to specific locations to support NYC.  Given our current levels of technology, that requires liquid fuels. 

Sun, 06/29/2014 - 14:02 | 4907377 Comte d'herblay
Comte d'herblay's picture

Then what we need is a salt water fueled machine.  With all that ocean water, full of salt and potential, a wizard should be able to convert Salt Water to fuel.

 

  (sôlt)

1. Any of a large class of chemical compounds formed when a positively charged ion (a cation) bonds with a negatively charged ion (an anion), as when a  halogen bonds with metal. Salts are water soluble; when dissolved, the ions are freed from each other, and the electrical conductivity of the water is increased.  See more at complex saltdouble saltsimple salt
Sun, 06/29/2014 - 14:10 | 4907396 El Vaquero
El Vaquero's picture

Salt water for fuel is a pipe dream without another massive source of energy to convert it into fuel.  Energy is the ability to do work, and work is force times distance.  Energy gets shit done, and it can neither be created or destroyed.  It can, however, be wasted or locked up in a form that we cannot use.  If this were a simple problem, it would have been solved already.  

Sat, 06/28/2014 - 22:58 | 4906407 willwork4food
willwork4food's picture

I respectfully disagree. The strategic oil reserves have not been opened for years, and how much do they actually have stored (withOUR tax dollars)? I suggest the cost of oil times does not reflect the availability of it because we have become a fascist state, and most western based central banking play along. They are gearing us up for shearing. Much easier to control and use resources on a fraction of the pop and still keep your wealth and control.

 

Sat, 06/28/2014 - 23:12 | 4906440 El Vaquero
El Vaquero's picture

The strategic petrolium reserves only store 727 million barrels.  We use 18 or 19 million barrels per DAY.  In other words, about enough for a month and a half.  And oil is getting more expensive, not because of fascism, but because of geology.  We used to drill a well a couple hundred feet, and oil would come gushing out of the ground.  Now we have giant floating rigs to get at the oil under the ocean and wells that are drilled not just down, but also horizontally for many thousands of feet at a high cost.  There is no comparison.  According to Steven Kopits, oil actually needs to cost more to justify our current extraction rates.  Oil companies are selling off equipment to pay shareholders.  You may find a few small pockets of cheap oil here and there, but for running entire national economies, cheap oil is gone. 

Sun, 06/29/2014 - 00:18 | 4906509 SirIssacNewton
SirIssacNewton's picture

Absolutely correct, El Vaquero.  The Strategic Petroleum Reserve plays abolutely no part in the price of oil within the world market considering the world consumes around 85+ million barrels of oil per day.  It's a nice "buffer" to create the political sense that the government has the ability to influence and control the price of oil.  The simple way to look at all of this, in terms of when the dollar will break and it will break, is to understand the concept of Energy Returned on Energy Invested (EROEI).  In the good old days of cheap oil, a company would slam in a vertical pipe and get 100 barrels out for every 1 barrel of consumed oil energy (EROEI Ratio of 100:1).  Over 80 years later, we are averaging to get about 15 to 10 barrels of oil for every 1 barrel of oil (EROEI 15-10:1).  There is a limited amount of oil in a finite world with an ever increasing population wanting a higher and more intensive food source.  Technology for squeezing a higher level of work out of each unit of energy certainly will help this situation, but most likely not in time.  Developed nations have a minimum level of of EROEI in order to sustain that particular system, which is conjectured to be at least a ratio of 6:1.  The dollar hegemony breaks when the others finally realize that it's back to basics regarding controlling resources for the complete benefit of that particular country.  China and Russia seem to be well on the way of moving their "monetary" and "other" assets towards exactly that aim.  The U.S. not so much.  This information coupled with the 4th Turning, the rise of fascism, the positioning of electronic money, the obliterating of the middle class.... tells a grim story of the dollar losing sway no later than 2025.  Whether with a whimper or a bang, that's a different question.

Sun, 06/29/2014 - 11:51 | 4907076 TheAnswerIs42
TheAnswerIs42's picture

Interesting post, SirIssac and I agree with most of what you said. However, the Athabasca Oil sands have been estimated at over 1 trillion barrels.

They are starting to use in situ production with Steam Assisted Gravity Drainage (which are two horizontal wells, the upper heats the bitumen which is then extracted from the lower).

The energy required to heat is currently nat gas, but will eventually be converted to use gasified bitumen at a 6:1 ratio (so they say).

See the Wiki.

 

Sun, 06/29/2014 - 18:30 | 4908018 SirIssacNewton
SirIssacNewton's picture

The Canadian Tar Oil Sands do represent a significant reserve.  Though, at the world's current rate of oil consumption—32.2 billion barrels per year, Canada's tar sands oil reserves remain at a finite 168.6 billion barrels, enough to keep the world fueled for less than six years.  With them ramping up production from 1.7 million barrels to their eventual target of 5 million barrels per day, only 8% of that represents surface mining with the rest of the reserves being an intensive below ground extraction process as you described above.  This below ground operation has an EROEI of 4-3:1.  We are having to go after lower quality hydrocarbons to replace the cheaper oil at an ever increasing cost.  It will certainly be profitable for those companies, but the cost to continue to extract those "units" of energy will continue to escalate.  If you haven't ever had a chance to listen to Prof. Bartlett's lecture about the terminal velocity of resources, you should check it out on youtube.  It's eight parts and may be a little dry, but great information sometimes takes great fortitude to acquire. <Lecture>

The next great run will be over all the hydrocarbons trapped in the melting Artic cap.  :-)  Good times ahead.

Sun, 06/29/2014 - 00:27 | 4906517 El Vaquero
El Vaquero's picture

Sure, those other countries are moving back to gold, but, IMO, gold and/or silver standards only act as a bulwark against the requirement of sustained growth, and then only before we've reached overshoot.  IMO, we've reached overshoot, and while they may be moving to gold, they're not doing anything meaningful that will get them off of oil, but they depend on it for things such as food, just like we do.  When the dollar breaks, hope that your local region has enough oil and equipment to extract and refine it to last for two years while everybody readjusts. While things may and probably will wind down slower than a month or two when the next crisis hits, don't bet your life on it.

Sun, 06/29/2014 - 08:43 | 4906826 CheapBastard
CheapBastard's picture

Simpy dust off all those shut down coal plants and open 'm up. Plenty of coal energy left.

Sun, 06/29/2014 - 09:11 | 4906859 dizzyfingers
dizzyfingers's picture

"Plenty of coal energy left."

Pardon this stupid question...is this oil-in-the-making, eventually?

Sun, 06/29/2014 - 11:18 | 4907014 Landrew
Landrew's picture

The other way around, coal was oil.

Sat, 06/28/2014 - 16:43 | 4905812 Chupacabra-322
Chupacabra-322's picture

Agreed. However, the Elite have been reckless as of late with their "Hidden Knowledge."

Sun, 06/29/2014 - 00:56 | 4906545 MeMadMax
MeMadMax's picture

The sooner the better...

I have an itch that wants me to scratch it on a island somewhere in the pacific... Watching the ICBM's pass overhead...

Sun, 06/29/2014 - 06:25 | 4906722 hootowl
hootowl's picture

.....as your Pacific Island is being steadily inundated by Ovomit's rising sea.

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