July 1, 2020

Hot Money the US Dollar and Currencies

Inter-market-relationships, the relationship between risk assets is temporal at best. They can exist for extended periods and end without the media’s “breaking news” alerts.  So the keen interest in measuring correlations is when they ALL reach “one.” When that happens you have hyper-correlation. In a phrase, all markets move in unison, and asset allocation or diversification is mute.  Today the background of all of the markets from commodity index to bonds sets up for a period of trends.

What is particular about the US dollar, is in the face of the proclaimed rabid printing of money since 2011 the dollar index has advanced from the low 70s to a recent high of 104 or 43%. A bullish move one would not expect with the world awash in greenbacks.  From the peak in early April, the index has corrected to the most recent area of bar chart congestion. That high to low range happens to be a 23% retracement of the entire move from 2011 low but more importantly, it is a 38% correction of the rally from February low. That advance is just the beginning of the meat and potatoes of the uptrend. In Ettiot wave terms, the third wave.

 

What gives Contrary Thinkers and this analysis confidence in this outlook is the context, , the volatility modeling underlying the market. The chart above on the left depicts a Technical Event (TE) #2 on the volatility data itself. This signal tells the investor/trader that a dynamic move is pending. This is based on weekly data hence it is a multimonth call. The weekly chart on the right shows the simple A-B-C decline with a typical “B” wave triangle.

The next chart is the first leg up from 2018 low that captures the A-B-C decline and the panic index on this weekly chart hitting an extreme and a buy signal.  It is also a low-risk chart pattern. From a strategy point of view, investors engage trend following systems here, letting the uptrend take you into the trade. with a system’s status off if the market falls below “C”. Much better risk management as opposed to simply going low here.

The condition behind the index is near identical to the volatility model for all other markets here in the early days of July.  For the buck, a TR#4 suggests that a low to high range of 10 points may be challenged, projecting 107.

The weekly chart in the middle says the current downtrend is old and ready for a change; and the short term chart on the right is registering a new TE#2. This background is calling for a trend and breakouts to get carried over. I have played the I-T support and resistance zones with the chart for breakout points. However, a short term band would be more sensitive to entry.

Back Story

The pace at which emerging market economies are losing FX reserves is staggering. In March, emerging economies lost around $1.5 billion in foreign exchange reserves per day, according to Bloomberg.

 

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Great and Many Thanks,

Jack F. Cahn, CMT

A Thinking Man’s Trader Since 1989,

Copyright 1989-2020

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