Daily Forex Commentary
By Jack Crooks
Quotable
She (Louise Yamada) believes the energy complex has entered a 20-year bull market cycle, which may have occasional corrections, but heads upwards nonetheless. "We think oil could go to $80 and I think over time we could see it go even higher," she says. - Louise Yamada, quoted in Barron's
FX Trading
Gold, oil, toil and $ trouble?
Good TIC data and the dollar tanks on the news on Monday. From Reuters:
Upbeat data showed more than enough capital flowed into the United States in February to offset its huge trade deficit, but that failed to stem the dollar's losses. "The sentiment is turning dollar negative - probably the biggest factor putting the dollar under pressure is the rise in oil prices and rise in gold prices," BNP Paribas senior currency strategist Ian Stannard said. "On oil - there's probably more of a risk aversion move taking place on the back of concerns with regards to supply which is a negative for the dollar," he added.
Being of the skeptical nature as we are, we wanted to see for ourselves whether rising crude oil and gold prices were putting the dollar under pressure, so we went to the charts.
And, sure enough, the dollar peaked when crude oil ebbed back in mid-November of last year. Gold didn't ebb much, but did put in a fresh high right around the same time mid-November after about two-months of consolidation. Is it coincidental or causal? Take a look:
One question that comes to mind: where is the "inflation expectation cum interest rate hike cum yield differential" to support the dollar in this scenario? Maybe this all goes to the "growth thing".
It's not a stretch to believe rising commodities prices and 15 Fed hikes might finally take a bite out of Mr US Consumer. From Jacqueline Doherty's The Trader column in Barron's this week:
Unlike the past five years or so, liquidity is slowly draining out of the US via the Federal Reserve's 15 consecutive interest rate hikes. "Monetary policy acts with a big lag," says Ravi Malik, a senior portfolio manager at Froley Revy Investment Co. "You have to anticipate [its results] because by the time it shows up it's too late." Malik believes the results will include lower housing prices and eased consumer spending, which ultimately will slow the economy in the second half of the year from its current strength. Stocks may start to anticipate this sooner rather than later.
Just as the US economy slows from its current red-hot pace, the Asian and European economies look set to pick up the slack and the emerging markets remain bulwarks of strength. Global markets seem to have sensed this shift. US financial assets - stocks, bonds and the dollar - are down 35% relative to the world's financial assets over the past three years, notes Bob Prince, co-chief investment officer at Bridgewater Associates.
If this continues, it will become tougher for the US to attract the foreign investment on which it's so dependant. Then there's the potential unwinding of the yen carry trade, where investors borrow cheap money in Japan and invest it in higher-yielding markets like the US In February the Bank of Japan ended its policy of pumping excess funds into the economy and Japanese and last week the 10-year Japanese bond rose to 1.975%, the highest rate in just over five years.
Wayne Nordberg, a senior director at Ingalls & Snyder, an investment-management firm, expects the dollar to decline 10%, which will be enough to make US assets unattractive versus those in the rest of the world. "Some time this year, in September or October, you'll see the S&P down 20%," he warns.
Well now, isn't that just special! So back to where we started: Was the TIC data rear-view mirror stuff? Is it all downhill from here as far as US asset demand is concerned?
We've seen the dollar doubters spew their view many times during its rally since late December 2004. Who knows, they may get it right soon or later. For now, the path of least resistance in the dollar is down. From a trading perspective, that's probably about the best we can do.
Black Swan offers a subscription-based currency advisory service for forex and futures traders.
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Jack Crooks has actively traded in global equity, fixed income, commodity, and currency markets for more than 20 years. He is president of Black Swan Capital, a currency and commodities market advisory firm - BlackSwanTrading.com