Tag Archives: usd index

Weekly Commodity Strategy Review

Monday began with an official COT Sell signal in the U.S. Dollar Index that we published in TraderPlanet. This trade was actually a follow up to the previous week’s piece also published in TraderPlanet.

We combined these into one post including the annotated US Dollar Index chart in – The USD Index – A Speculative Bull Trap?

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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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Weekly Commodity Strategy Review

Our first full week of the year puts the US Dollar Index on our radar as the most speculatively overpopulated market. Our piece for TraderPlanet took a look at this even as the Index itself continues to rally.

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Global Impact of Cheap Oil

The crude oil market has declined by approximately 45% since this summer. The massive decline has surpassed most analysts’ expectations including those who advise sovereign nations on international foreign trade issues. The biggest problem most of us face is determining the difference between falling oil prices and gasoline being a good thing at the personal, micro level compared to the damage that falling oil prices have had on equity and currency markets at a macro level. Unfortunately, the answer lies on a continuum rather than an easy black and white answer or a single numerical value. This week, we’ll look at differences in the economic makeup of the major players and determine where they stand in terms of currency and budgetary risks due to oil’s precipitous decline.

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Currency Trading the Scottish Secession Vote

Thursday’s landmark vote to return Scotland to its own sovereignty is becoming a tighter race with each passing day. The interesting part in the analysis is that the money has been flowing into the British Pound and Euro Currency and out of the U.S. Dollar Index. This places the commercial traders’ actions directly at odds with the currency markets’ collective movement over the last two to three months leading into the Scottish secession vote.

We cover the analysis of the following charts in Equities.com.

Currency Reversal on Scottish Vote

us dollar buying into scottish vote
US Dollar Index sees major commercial trader selling heading into Scottish vote.

See more of our Recent Trades at COTSignals.

Pound Sterling buying before scottish vote
Strong buying of British Pound Sterling heading into Scottish vote.

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buying the Euro into scottish vote
Strong buying of Euro Currency heading into Scottish vote.

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.

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Trading’s Gut Check

Actively participating in the markets comes with the understanding that the trader’s gut will be checked frequently and deeply. The primary cause of this is the trader’s degree of certainty in an uncertain world. It’s been proven over and over again that once an individual feels that they have enough information to make a decision, they will. Additional information provided after the fact typically raises the degree of certainty that the correct decision was made, rather than raising the degree of accuracy. So, I sit in front of the Federal Reserve Board’s announcement this afternoon involved up to my eyeballs in the US Dollar, Euro currency, 10-year Treasury Notes and the Russell 2000 stock index.

Each one of these positions is the result of mechanical trading programs that I’ve developed, tested and traded. Therefore, there are no arbitrary decisions or adjustments to be made. This leaves me in front of the screens sitting on pins and needles waiting for a range of possibilities to materialize. Given my experience with the markets, I expect the outcome to be somewhere in the middle. Rarely does it turn out one sided either positively or, negatively.

Let’s review the possible outcomes and the gut wrenching turmoil that comes with sitting on several large positions as I try to close out the books for 2013. My oldest position on the books is short the Euro FX. I stand to profit if the Euro currency weakens against the US Dollar. I’m short the market near the top of its range based on my research into the Commitment of Traders Reports. I know that there’s about a 60% chance the Euro will back off these highs by about a penny and a half. However, the market’s continuing consolidation near these highs puts me in a position where I could be stopped out of the market with a loss even before the Fed announces its decision this afternoon. The market’s proximity to my stop loss order contributes greatly to my angst.

The opposing position to the Euro is my long US Dollar Index position. Again, I’m long the US Dollar Index against a basket of currencies, which is dominated by the Euro. If the Fed suggests that they will begin to taper quickly, the Dollar should rally. Pulling stimulus out of the economy will place fewer Dollars in future circulation thus, increasing the value of the Dollars already in the market. The Dollar would rally and the Euro would fall. Both of my currency positions would be profitable.

Tapering by the Fed would most likely crush my 10-year Note position. Frankly, the discretionary trader in me can create the strongest case for owning 10-year Notes and betting against taper talk. Based on my analysis of the commercial traders in the 10-year Note I fully expect any decline in Treasury prices to be short lived. Commercial traders have accumulated their largest net long position in the 10-year Note since April of 2005. Commercial traders have dominated the big moves in the Treasuries with uncanny accuracy. If they’re right about no taper talk this afternoon, Treasuries will rally substantially and I’ll profit from my position….while losing on my currency trades.

This leads to my final position. I use a pretty fancy program for developing my day trading systems. Whereas my swing-trading program is based on the fundamental data inferred from the collective positions of the markets’ participants, my day trading programs are strictly technical. Knowing that the markets will unfailingly put a man to the test, it should come as no surprise that my day trading programs now have me long two units of the Russell 2000 stock index heading into this afternoon’s announcement. Furthermore, while I have some expectations of how the currencies and Treasuries will react to the Fed’s decision, the stock market’s reaction is far less predictable. If the Fed tapers, the stock market may rally further based on the assumption of a strong economy leading to further gains. However, the collective reaction could very well be violently lower as tapering could signal the end of the free money that many believe has fueled the rally to this point.

Discretionary traders face conflicting data like this all of the time and pick and choose which markets they’re in and when they’re in them. Systematic traders follow the signals generated by their programs without question. The cruelest aspect of trading is the market’s uncanny ability to seek out a traders’ weak spot and twist agony’s knife. I’ve been actively trading for more than 20 years and the trepidation of a pending report never goes away. This is where the classic line, “Plan your trade. Trade your plan” has the most value. Remember, additional information acquired after the fact doesn’t increase the odds of being right, it simply tricks the mind into greater certainty of the existing thought pattern.

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.