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Dollar Bulls Regain Upper Hand
The powerful divergence theme re-emerged and effectively ended the dramatic correction throughout the capital markets. The FOMC statement strengthened conviction of a mid-2015 lift off, even if the pace of tightening may be somewhat slower than previously anticipated. At the same time, the Swiss National Bank's decision to move to negative interest rates, partly in anticipation of the ECB expanding its asset purchases as early as next month, underscores that Europe remains well behind the US in the credit cycle.
Rather than attribute the downdraft in the dollar and equity markets to a shift in underlying fundamental drivers, we had seen the hand of a technical correction, driven by short-term market positioning, and aggravated by year-end portfolio adjustments. Indeed the euro peaked within a few ticks of the 50% retracement objective of its losses from the October 15 high near $1.29. For its part, the dollar's dramatic slide against the yen stopped just shy of a key retracement objective of its rally from both October 15 and October 31 that was found near JPY115.50.
We expect the dollar's higher trend to continue. However, the lack of participation over the next two weeks could obscure this trend. The Dollar Index made a new high before the weekend near 89.65. A move above 90.00, which has held back previous dollar bounces since the onset of the Great Financial Crisis, would signal an acceleration of the dollar 's advance. Initial support is pegged in the 88.80 area.
The euro recorded a new low for the move just before the weekend near $1.2220. A break of $1.2200 would suggest losses toward $1.20. It has not been able to resurface much above $1.2300 since breaking below in response to the SNB's decision.
Technical indicators suggest the dollar's uptrend against the yen will resume. The move above JPY119.50 strengthens the conviction that the greenback is on its way back to the December 8 high near JPY121.85 and beyond. Initial dollar support is seen in the JPY118.50-80 area.
Sterling is not particularly interesting at the moment. It caught between the strength of the dollar and the weakness of other currencies, including the euro, Swiss franc, yen and Australian dollars. Against the greenback, it has been confined largely to a $1.56-$1.58 trading range since mid-November. There has been a handful of violations of the two-cent range. Technical indicators suggest risk remains to the downside. Sterling set a low near $1.5540 on December 17, but the snap back into the range seemed halfhearted. Resistance is seen $15680-$1.5700.
The dollar-bloc currencies are still headed lower. They did not participate in the bounce that the euro and yen enjoyed. Resistance in the Australian dollar is now pegged near $0.8200. Our next important target is near $0.8000, ahead of that are the lows from 2010 around $0.8060-70. The US dollar reached a high of roughly CAD1.1675 on December 15, this was the lower end of the range we have been suggesting the greenback had near-term potential toward. The upper end of that range is near CAD1.1725. Since recording the highs, the US dollar has not been below CAD1.1560.
The dollar peaked against the Mexican peso on December 12 near MXN14.95. Five days later it had slumped to MXN14.37. By the end of the week, the dollar's bull move appears to have had recovered to above MXN14.70 In the days ahead, the dollar may consolidate its gains. It could pullback toward MXN14.50, though, over the medium term, it appears the dollar can retest the 2009 high near MXN15.60.
The US 10-year yield bounced off of the 2.0% level to near 2.25%, where the rally faded. Economic data out next week are expected to show stronger capex (durable goods orders) and stronger growth momentum (upward revision to Q3 GDP to above 4%). This may limit the pullback in yields.
At the same time, we note that the premium the US pays over Germany widened out to almost 160 bp this week. This is the largest premium since mid-1999. It began the year near 110 bp. The widening was a result of German bund yields falling further than US yields fell.
Although the US 10-year yield remains relatively low, the 2-year yield has firmed, and at 65 bp is 1-2 bp below the five-year high set earlier this month. The US premium over German at this tenor is about 73 bp, which represents a new three-year high. These relative interest rate developments are understood to be constructive for the dollar.
The S&P 500 gapped higher December 18 following a strong close the previous day after the FOMC meeting and seemingly aided by the Swiss National Bank's move to negative interest rates. It had advanced further before the weekend. From the mid-week low to the pre-weekend high, the S&P 500 gained about 95 points or 5.2%.
That gap is between 2016.75 to 2018.98. We do not look for this gap to be filled in the near-term. Rather the gap, like the one on October 21, signals the end to the corrective losses and the resumption of the bull advance that carries it to new highs.
There is a reasonable chance that the February crude oil futures contract has put in a short-term low around $54.30-60. The RSI is turning up, and the MACD is about to cross. The sellers were pulling back, and bargain hunting was reported. The $60.00 level is the first hurdle and near $63.00.
Observations based on the speculative positioning the in futures market:
1. There was only one significant position adjustment of more than 10k in the latest CFTC Commitment of Traders report for the week ending December 16. It was the 12.4k contract reduction in the gross short euro position, leaving 182k contracts still short. The net short position has been reduced by 52k contracts since peaking in early November, which is fully accounted for by short covering.
2. There were several other gross currency positions that changed by almost 10k contracts. The short yen position was reduced by 9.6k contracts to 132.6k. The gross long Swiss franc position doubled to 18.9k. The speculative gross long Australian dollar position increased by 9.4k contracts to 26.8k.
3. All the currency futures we track here but the Canadian dollar saw gross short positions trimmed in the latest week. This seems very much consistent with squaring up ahead of the holiday season. For its part, the gross short Canadian dollar position rose a by 300 contracts.
4. The speculative net short US 10-year Treasury futures position increased by 20% to 258k contracts. A full 10% of the gross long position was liquidated, or 32.3k contracts were sold to leave 273.4k still long. The gross short position increased by 24.6k contracts lifting the short position at 531.6k contracts. It has risen by 70k contracts over the past three reporting weeks. Over the same period, the gross long position has fallen by 110k contracts.
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The dollar will get stronger until it collapses to zero. That is it gets stronger as more debt is paid back, until the moment when everybody defaults. He who defaults first defaults best.
The dollar has had agreat ride with more to come. But first it will correct in a multi-month pullback that will see Treasury yields rise along with gold...
Dollar
http://www.globaldeflationnews.com/u-s-dollar-indexelliott-wave-update-f...
10 YR Treasury
http://www.globaldeflationnews.com/10-yr-u-s-treasury-index-yieldelliott...
Gold
http://www.globaldeflationnews.com/gold-elliott-wave-update-for-week-end...
Sure, Dollar is fine, economies are fine, it's just a game that won't result in famine or war.
Yup, sure, just like history teaches: "It's all good!" Wait...
War is the health of the state, and having control of the most powerful military industrial complex in the history of mortal existence on planet earth allows for a strong currency which ever your currency happens to be.
The dollar is only as good as the military that defends it, so as to say, that the military defeated today, could spell the death of the dollar tomorrow.
Get to work Mr. Bullard!
God damn fucking dollar bulls. The Fed just printed a cool $2 trillion then leveraged it up 50 to 1. Is there strength in that?
While the dollar is poised, for the long term, to take off into the stratosphere, it will have a multi-month correction beginning any day now.
http://www.globaldeflationnews.com/u-s-dollar-indexelliott-wave-update-f...
Perhaps 20 or 30 years ago, Ewtman, when the global structure was dictated and secured as far as the eye could see, by U.S. hegemony. Not so any more my friend. EWT can't take into account the changes afoot, nor the pace. It's a new day - and not necessarily a good one.
The dollar's supply will dictate its long term trend.
Given your recent track record, Marc, I will look for the dollar to fall again next week.
FieldingMellish--if you say so...I have been telling you the dollar is trending higher and I tell you why. I even tell you levels to look for counter-trends may end. And besides, there are worse things than being wrong. If you think you can do better, please share your views every week.
The strengthening dollar may be sending a signal that the whole system is unstable. Other currencies are under assault because both economies are weak and countries are buried in debt they can never repay at real market interest rates. The change in currency values may be dramatic and using history as a guide markets often show no mercy when this shift occurs.
For months the major world currencies had traded in a narrow range as if held in limbo by some great force. This has allowed people to think we were on sound footing as central banks across the world continued to print and pump out money chasing the "ever elusive growth" that always appears to be just around the corner. Recently the major currencies have made multi-year highs or lows depending on the match-up.
John Maynard Keynes said By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known. Weakness in the value of the Yen, Pound, and Euro must not go unnoticed. The article below looks at why this trend may accelerate and cause the stock market to drop like a stone.
http://brucewilds.blogspot.com/2014/10/fed-concerned-that-stong-dollar.h...
So I wasn't even close to being alive in 1945 but sure have a feeling this is what it felt like. "Stupid money."
I have said the biggest killer for my long treasury bet has been an uber dollar since that is the most superior debt instrument of all. And who likes a stronger Bucky?
Absolutely NOBODY.
Does it get any better for buyers of gold or silver? I say NO WAY.
Right now I still think the best investment is a 2014 Chevy Cruze from the dealer but I did see a nice freightliner for twenty grand out in New Hampshire. Throw in a quality co-pilot and who knows.
Seriously there have been some staggering losses in the energy patch and even greater ones on Wall Street but these are the same folks who had no problem blowing up the entire airline industry in the 70's so phuck 'em.
Wanna saddle the American taxpayer with unpayable debts? Make sure that paper dollar is the most valuable thing on the planet.
And any other planet for that matter.
Excellent article.
"When the dollar falls, we are told it is logical. The empire is crashing and burning. When the dollar rises, the markets, we are told are manipulated. Well, the dollar is..."
I was wondering when the smarmy headlines would resume - they've been conspicuously absent the last couple of weeks from Marc to Market...
Consuelo, I am sure you think you are smart, so I will let you in on a secret. A headline is meant to get one to pique your interest. And for the record, it is your comments about my headlines that are most smarmy. Get over yourself.
Agreed. Clownish and misleading headline.
It appears some people just can't face the facts.
http://www.paulcraigroberts.org/2014/12/17/financial-market-manipulation...
we are in a printing economy and debt has the meaning the CBs and their Oligarchs attach to it.
New normal until somebody pulls the plug on it !
The strong dollar means, that in uncertain times, the Oligarchy reigns...SUPREME !
There doesn't seem to be any obvious reason that the Euro should EVER have exceeded parity with the dollar.
Why it shouldn't move down another 25% is purely some kind of clandestine or conspiratorial fakery putting and keeping it there.
All this "data" is compared to the last 5 years of abyssmal results using QE/HFT stained numbers.