Tag Archives: u.s. dollar index

Continued Strength in the Dollar Index

The Dollar Index made an interim high when the market appreciated Janet Yellen’s dovish statement following the March FOMC meeting. The market has consolidated over the last couple of months between the recent highs and the support that has built up around 93 in the Index. The Dollar’s decline over the last couple of weeks has been bought by commercial traders. We sent a COT buy signal last night. It was based on these factors and triggered by an upturn in our proprietary short-term market momentum indicator.

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The USD Index – A Speculative Bull Trap?

This was our U.S. Dollar Index piece posted at TraderPlanet on Monday. It seems there was an issue with the chart.

The piece actually begins with our January 5th article when we saw the commercial trading position getting out of whack as based on the Commodity Futures Trading Commission’s weekly Commitment of Traders reports. Our initial discussion can be found here.

The USD – A Small Washout Coming?

We updated it this week with the following piece, chart and trading signal.

The USD Index – A Speculative Bull Trap?

The commercial traders now control 70% of the total open interest. Official COT Sell Signal issued.
The commercial traders now control 70% of the total open interest. Official COT Sell Signal issued.

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Timing the Dollar’s Run

The U.S. Dollar has been the best house in a bad neighborhood since the U.S. Federal Reserve Board announced its intentions to taper the U.S. economy off of its monthly stimulus supplements. Protracted issues in Ukraine and the sanctions levied against Russia have created a major capital flight from Eastern Europe as a whole. The European Union recently announced its own form of Quantitative Easing and finally, on Halloween, Japan dropped the mother of currency bombs. Their announcement that they would not only invoke another round of currency destruction but would also become direct investment participants in their own stock markets created a shock through the investment landscape that I’ve not heard in non-crisis times.

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Currency Reversal on Scottish Vote

Today’s Scottish secession vote takes a 300-year-old issue and covers it with 21st century journalism. There’s hardly any angle that hasn’t been talked to death. Surprisingly, I’ve found something of major importance leading up to the vote that isn’t being discussed anywhere. The commercial traders in the Commodity Futures Trading Commission’s weekly Commitment of Traders report are making a clear point that they collectively feel that the currency markets are about to tighten, rather than continuing to widen as they have for the last month or so.

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Tracking Commercial Interest in the Commodity Markets

The commodity markets have been unkind to long only funds and indexes in 2014. Most of the commodity markets have been sideways to lower with a couple of exceptions like cocoa and cattle. This week, we’re focusing on the broader commodity landscape due to an article published on Bloomberg by Debarati Roy in which she stated that open interest in gold had slumped to a five year low. We’ve expanded on this topic to include 27 general commodity markets and compared their current open interest to where they stood both one month and one year ago respectively. The purpose is to determine whether smart money is headed into or, out of the commodity markets in general as well as what affect this may have on the markets going forward.

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Global Uncertainty Strengthens Dollar

Five years ago the financial world was coming to an end. The stock market tanked and interest rates went negative due to the unsurpassed flight to safety in U.S. Treasuries. Most of this was due to greedy lending practices that claimed to be championing President Clinton’s thesis that everyone in America should be able to own a home. Lax lending requirements that were intended to get lower income earners into their own homes travelled up market and allowed upper middle and upper tier earners to refinance their houses at artificially low rates to buy second homes and Harley’s. Once again, misguided bureaucratic endeavors have been perverted by greed. The roaches in China are beginning to surface and the banking system stress tests in Europe are uncovering the depth of this five-year-old issue and once again, the primary beneficiary of these actions will be the U.S. Dollar.

Continue reading Global Uncertainty Strengthens Dollar

Not Quite Time for Gold to Shine

The gold futures market is still looking for support since reaching a high near $1,800 per ounce in early October. The market had fallen by nearly $200 per ounce as recently as early this month. Fiscal cliff issues as well as tax and estate laws fueled some of the selling. However, commercial traders were the dominant sellers above $1,700 per ounce as they sold off their summer purchases made below $1,600. I believe the gold market has one more sell-off left in it before it can turn higher with any sustainability.

Comparatively speaking, gold held its own against the Dow in 2012 with both of them registering gains around 7% for the year. However, the more nimble companies of the S&P 500 and Nasdaq soundly trounced the returns of each, registering gains of 13% and 16%, respectively. The relative advantage of gold in uncertain times may be running its course. There currently is no inflation to worry about and CEO’s are learning how to increase productivity to compensate for increased legislative costs. Finally, the S&P has risen by about 19% over the last 10 years while gold has rallied by more than 250%. Therefore, sideways market action in gold over the last couple of years seems justified.

Meanwhile, seasonal and fundamental support for gold hasn’t provided much of a kick over the last two months. Typically, the Indian wedding season creates a big source of physical demand in the gold market from late September through the New Year. In fact, the strongest seasonal period for gold is from late August through October in anticipation of this season. This effect should be gaining strength due to the rise of the middle and upper middle classes in India yet, the market seemed to absorb this support with nary a rally to be had. I think we’ll see the market’s second strongest period, which begins now, and runs through the first week of February provide us with a tradable bottom and rally point.

Finally, the last of the short-term negatives is the strength of the U.S. Dollar. The U.S. Dollar trades opposite the gold market. Gold falls when the Dollar rallies because the stronger Dollar buys more, “stuff” on the open market and while we’ve talked about commercial traders buying gold, they’ve also been buying the U.S. Dollar Index. Commercial traders have fully supported the Dollar Index at the 79.00 level. The Dollar Index traded to a low of 79.01 on December 19th followed by a recent test of that low down to 79.40. The re-test of the 79.00 low has created a bullish divergence in technical indicators suggesting that this low may be the bottom and could lead to a run back to the top of its trading range around 81.50. This can also be confirmed in the Euro Currency and the Japanese Yen. The Euro currency futures market has seen commercial traders sell more than 120,000 contracts in the last six weeks as the market has rallied from 1.29 to 1.34 per Dollar. Meanwhile Japan’s new Prime Minister, Shinzo Abe, has turned the country’s monetary presses up to 11 in an attempt to jump-start their domestic economy.

The absence of an expected rally in the gold market through the last few weeks leads me to believe that the internals simply don’t support these price levels, yet. Therefore, the market will continue to seek a price low enough to attract new buyers beyond the commercial traders’ value area. Typically, this would lead to a washout of some sort that may force the gold market to test its 2012 lows around $1,540 per ounce before finding a bottom.

Furthermore, the flush in gold would most likely be accompanied by a rally in the U.S. Dollar and could push it back above the previously mentioned 81.50 level. Proper negotiation and resolution of the pending debt ceiling would most likely exacerbate both of these scenarios while also including a large stock market rally. Conversely, a legislative fiasco would lead to a Dollar washout, as the global economies would lose faith in our ability to manage ourselves and treat our markets accordingly. Therefore, in spite of the inter-market, fundamental and technical analyses we will keep our protective stops close on our long Dollar position while waiting for an opportunity to buy gold at discount prices for the long haul.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

The Value of the U.S. Dollar

The Federal Reserve Board is printing money at an unprecedented rate. The ECB is following suit. The Bank of England and China are both cutting rates to spur their economies and global sovereign debt is piling up like manure behind the elephant pen. Clearly, our currency is being devalued by the day. Some would argue that there’s a race to devalue among the major global currencies as the G7 nations attempt to boost exports and spur their respective domestic economies. Tangible assets like gold and silver or soybeans and crude oil may be the only true stores of value left in an increasingly wayward world. We read this every day. The truth is far less dramatic. In an ugly world, the U.S. Dollar is the prettiest of the ugly sisters at the ball.

The U.S. Dollar Index is exactly where it was four years ago. This is interesting considering that the aggregate money supply in the U.S. as a result of the quantitative easing programs has nearly doubled since the housing market collapsed. Theoretically, doubling the supply of U.S. Dollars should mean that each new dollar is worth half as much. Take this one step further and it’s logical to assume that if each new dollar is worth half as much then it should take twice as many dollars to make the same purchases that were made in 2008 yet, the Consumer Price Index is only 4.5% higher than it was then. Finally, I would suggest that considering the growth of the money supply and its characteristic devaluation, we should see an influx of foreign direct investment picking up U.S. assets at bargain basement prices. While logical, this is also incorrect as the U.S. Department of Commerce shows that foreign direct investment only exceeded U.S. investment abroad in 6 out of the last 20 years with 2005 as the most recent.

What has happened through the artificial manipulation of interest rates in the world’s largest market is that the U.S. Dollar has begun attracting large amounts of money as U.S. and global investors park their cash while waiting for clarification on the world’s major financial and political issues. Real interest rates in the U.S. are negative at least 10 years out. The Euro Zone is no closer to resolution. China is in the midst of changing leadership in a softening economy. Finally, what was an assured re-election of President Obama is now a legitimate race.

The inflows to the U.S. Dollar are easily tracked through the commercial trader positions published weekly by the Commodity Futures Trading Commission. The U.S. Dollar Index contract has a face value of $100,000 dollars. Commercial traders have purchased more than 25,000 contracts in the last few weeks, now parking an additional $25 billion dollars. The build in this position can also be seen in their selling of the Euro, Japanese Yen and Canadian Dollars. The Dollar Index is made up of these currencies by 57%, 13% and 9%, respectively. Collectively, commercial selling in these markets adds another $5 billion to their long U.S. Dollar total. The magnitude of these moves makes commercial traders the most bullish they’ve been on the U.S. Dollar since August of last year which immediately led to a 7.5% rally in the U.S. Dollar in September.

The degree of bullishness by the commercial traders in the U.S. Dollar forces us to examine the markets most closely related to it in order to monitor the spillover effect a rally in the Dollar might create. The stock market has traded opposite the Dollar for all but four weeks in the last two years. The last time these markets traded in the same direction on a monthly basis is August of 2008. The current correlation values of – .29 weekly and -.43 monthly suggest that for every 1% higher the Dollar moves, the S&P500 should fall by .29% and .43%, respectively. Therefore, a bullish Dollar outlook must be coupled with a bearish equity market forecast.

Finally, we see the same type of relationship building in the Treasury markets. The U.S. Dollar is positively correlated to the U.S. Treasury market. This makes all the sense in the world considering foreign holdings of U.S. debt have increased over 5% through the first seven months of 2012 (Fed’s most recent data). The bulk of these foreign purchases of U.S. debt are repatriated immediately to eliminate currency exchange risk. This process of sterilization forces interest rates and the Dollar to trade in roughly the same direction. This relationship turned briefly negative between April and June of this year on a weekly basis while one has to go back to March of 2010 to find a negative correlation at the monthly level.

Obviously, the trade here is to buy the U.S. Dollar. The negative speculative sentiment coupled with the bullish and growing position of the commercial traders could fuel a forceful rally. Small speculators typically accumulate their largest positions and are the most wrong at the major turning points. A recent study in the Wall Street Journal discussing individual traders’ biggest mistakes puts it succinctly. Small traders’ biggest mistakes, accounting for 60% of the total responses are being too late to get in and too cautious to take the next trade. Once burnt from exiting the last trade too late, the small investor is too scared jump in the next trade which reinforces the negative feedback loop they typically end up stuck in. Take advantage of this analysis and at least, prepare yourself with an alternate game plan.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Commercial Traders Wary of Risks Ahead

 

Commercial traders are building the case for their negative
outlook on the stock market. Their actions in several markets can be seen as
increasingly defensive over the last several weeks. Their behavior is also
beginning to be confirmed by several technical indicators, some of which are at
levels that haven’t been seen in nearly 15 years.

Last week we used the employment situation, profit margins
and earnings to suggest that it would be an historical event to start a new
bull market leg upwards from these levels and therefore, the short term pop on
the debt ceiling rally could be sold in the stock index futures market to
generate a short term profit. Deeper analysis reveals that selling stock index
futures at these levels may be an appropriate hedge for the longer term.

We all know that trading volume declines in the summer
months and the, “dog days of August.” Lower volumes and fewer market
participants leads to higher volatility. Monday morning’s sell off in the
S&P 500 was dramatic enough to make me sit up and take notice. The market
opened at 9:30 better than 1% higher thanks to the resolution of the debt
ceiling deal. The market then promptly sold off nearly 3% in a couple of hours.
The speed of its fall is what is noteworthy. A closer look shows that the
number of market participants as measured by open interest is the lowest it has
been since 1997. Open interest peaked in December of ’08 at more than 755,000
contracts. It is currently under 300,000.

Declining open interest becomes increasingly negative the
farther the market moves. Friday’s close marked the first week the S&P has
closed under its 40 week moving average since September of last year. A simple
timing model using the 40-week average and some interest rate calculations will
provide far superior risk adjusted returns simply by staying out of a weak
market that is trading below this level.

Moving to commercial trader analysis, we can see that they
have increasingly sold stock index futures since mid-June, in line with the
debt ceiling concerns. Their defensive trading behavior can also be seen in
their purchases of U.S. Treasuries. They have been solid buyers over the last
several weeks with a strong emphasis on short duration maturities like
Eurodollars and the 2 and 10 year Treasury Notes. The last part of the
inter-market puzzle is the strong move to U.S. cash reserves via the U.S.
Dollar Index. Commercial trader buying has increased by a startling 70% or,
more than 17,000 contracts in the last week.

Given the troubles coming to a budget agreement I looked
into why money was coming into the Dollar. The simple answer is that it’s a
value play relative to the Euro currency and the gold market. The recent
European Central Bank bailout of Greece is seen as a band-aid on a chain saw wound.
Two ECB questions remain, when will Greece default and will Italy and Spain be
next? The markets continue to question whether they will be able to continue
paying their debts and this can be seen in the record high interest rates they
are being forced to pay in the open market.

Finally, commercial traders see the typical safe haven of
gold as overvalued. Small traders and funds are holding a near record long
position in the gold market. The concern is that when the stock market fails
and cash needs to be raised, it can only come from positions that are
profitable. This would lead to profit taking in the gold market and drive it
lower. Since small traders and funds are typically quicker to react to major
market moves, the concern is that when the gold market falls, it could fall
quickly and deeply. This would wash out many of the small traders and put gold
back into play for the commercial hands waiting to buy the market again.