We have been resolutely Bullish the US Dollar this year…all of our trading in the currency futures and options market has be predicated on a Bullish Dollar view. We have repeatedly recommended to our readers to NOT take net short positions against the US Dollar. We have traded currencies for over 40 years and we have learned that currency trends often go WAY further than seems logical or reasonable.
The USD Index closed last week at 8 year highs…it began to accelerate higher in July and is up ~11% since then…
The major commodity indices fell to new 4 year lows last week…down 32 to 36% from their 2011 highs…as the US Dollar rose to 8 year highs…
Central Banks outside the USA are fighting deflation…falling commodity prices will force these banks to intensify their simulative actions…thereby adding to the market’s perception of a widening “split” between the FED (tightening) and other Central Banks (easing)…this perception is US Dollar bullish.
The Yen is at 7 year lows…down ~36% in the last 2 years…down 17% since July…
The Euro is at 2 year lows…down 13% since making a Weekly Key Reversal Down in May.
The weak CAD (now at 5 year lows) has been a “shock absorber” for the Canadian economy…if the CAD was still above par, unemployment would be rising …not falling. As a long term currency hedge in 2007 we began switching a significant chunk of our net worth into USD….at an average exchange rate above par. This strategy was not a “trade” but rather a currency diversification once we realized that we had hugely benefited from “being in the right place at the right time” while the CAD rallied from 62 cents to well above par on the back of the 2001 – 2011 credit driven commodity bull market. We expect to see the CAD lower against the USD in 2016….but…
We continue to expect CAD to strengthen against other principle currencies…
WTI Crude Oil fell ~38% since June…hitting 5 year lows…
Here’s what happened to the currencies of some oil producing countries since June:
US Dollar Index: UP ~11%
Canada: DOWN~ 6%
UK: DOWN ~9%
Mexico: DOWN ~11%
Norway: DOWN~18%
Russia: DOWN ~60%
The collapse of the Russian Ruble shows how a weakening currency can lead to a stampede of capital flight when markets lose confidence and panic…
The Gold Market: made new 4 year lows in November…but rallied $80 from overnight lows on December 1. If gold had closed last week above $1210 it would have created a Weekly Key reversal Up…that didn’t happen…but we are watching gold closely. The 3 year downtrend in gold remains intact (that strong US Dollar hurts!) but a December close above $1250 in this bullish USD environment would be very interesting and would likely led to more gains.
The Stock Market: We have been skeptical of the stock market for the past 2 years. During that time we have opportunistically traded it from the short side. We have made some money…but we would obviously have made much more if we had simply “gone with the trend” and been buyers…especially if we had embraced a “Buy the Dip” mentality. We may be slow learners but we have changed our minds…where we used to see stocks as “over-valued” because of Central Bank printing…and therefore likely to “collapse” once the Central Banks “changed their ways”…we now think that stocks may be “the only game in town” as pension funds and other institutional pools of capital “rebalance” their portfolios away from low yielding fixed income and into stocks. In a deflationary world Central Banks are likely to keep interest rates low for a long time…especially outside the USA. So we foresee a possible “double-whammy” of a global multi-trillion dollar rebalancing of institutional money into stocks…and a global flow of capital to America in search of safety and opportunity driving US stocks higher…perhaps much higher. (A possible reprise of the 1995 – 2000 period when the USD rose by 50% and the S+P tripled!)
