The US Dollar has surged higher the last few weeks…as money leaves the “rest of the world” and comes to America seeking safety and opportunity. We have been relentlessly bullish the US Dollar for months…believing that it is in the early stages of a multi-year bull market…BUT…we think it is WAY OVERDUE for a correction so we are now FLAT the currency markets in our short term trading accounts.
It’s a bi-polar world…with the USA representing ~24% of global GDP and growing…while the other 76% of the world seems to be slowing….setting up the important “diverging central banks” story. The US Dollar may be short term WAY overbought…but in our 40 years of trading currencies we have learned that FX trends go WAY further than you think is possible or reasonable. So we are on the sidelines…waiting for a correction to re-enter long positions on the Dollar…we do NOT want to be short. The Dollar is at 4 ½ year highs…up ~10% in the last 5 months…up ~20% since May 2011…a date we believe was an important Key Turn Date across markets…the date we believe the current multi-year Dollar bull market began.
The Yen is at 6 year lows…down ~28% (!!) since the market realized that Abe was going to win the election in late 2012 and take dramatic steps to end deflation in Japan…one of those steps was to weaken the Yen…a classic “Currency Wars” move!
The Euro is at 2 year lows…down from 3 year highs in May when it reversed with a Weekly Key Reversal Down…it’s down ~11% in the last 5 months.
The CAD is just above the 5 year lows of 88.50 made in March of this year. On the May 2011 Key Turn Date (and again in July 2011) CAD topped out at 1.06…as the US Dollar started to rise and commodities began to fall. The CAD is down ~16% from its May 2011 highs. We look for the CAD to make new lows this year against the US Dollar and fall further in 2015…BUT…we see the CAD rising against most other currencies.
The CRB commodity Index hit All Time Highs in 2011 and then started to fall as the US Dollar started to rise. The CRB is now at 4 year lows…down ~30% from its highs. A strong US Dollar is “bad news” for commodity prices.
Gold also reversed from All Time Highs in 2011 as the Dollar started to rise…a break of the $1180 lows targets $1000…or lower.
One of the reasons we think that the Dollar is in the early stages of a multi-year Bull market is because the major up and down cycles over the last 40 years have run for about 5 to 7 years. We think the current Bull Cycle started May 2011 and may have another 2 to 4 years to run.
We bought S+P puts September 19…the day the DJIA, DJT and the S&P 500 hit All Time Highs (and Alibaba debuted) and turned lower…BUT…we liquidated those positions last week (well off the lows) as we feared another “buy the dip” surge. The S+P has bounced off the trend line from the November 2012 lows…lows made as Abe took over in Japan and launched his inflation program….lows we consider to have initiated the Latest Bull Leg Higher in the 5 year American stock market rally. We remain skeptical of the stock market but look for it to exhibit “topping action” over the next several weeks rather than just “turn on a dime” and head lower.
Market Psychology began to turn negative the first week of September (Martin Armstrong) while the major US stock market indices continued higher. They (and Treasury yields) turned down on Sept 19…with the DJIA falling 675 points from the Sept 19 top to the Oct 2 bottom as the VIX jumped higher. We have huge respect for the momentum of the 5 year Bull Market in American stocks…we can imagine that some the money flowing into America from the “rest of the world” will go into stocks. We remain skeptical of stocks at these levels but look for “topping” price action for the next few weeks rather than a simple “turn of a dime” transition from a bull to a bear market.
