The US Dollar made a lower low on Wednesday as the June CPI continued the disinflationary trend
How long will he tilt at the inflationary windmill? A hawkish Fed has been the US dollar’s ally since tardily taking up the fight against the “transitory” inflation over a year ago. The June CPI report was yet another indication that the Fed is tardy once again, going the other way.
The US dollar has been technically bad for a while now as it has been grappling around the 50 day moving average while the 200 day average, well below which Uncle Buck resides, has turned down. Here is the daily chart of DXY at Wednesday’s US market close, showing the buck cracking key support, for a day at least.
The 101 area – now being violated, pending one or two days’ confirmation – is not just the flimsy support shown on the daily chart. It is the last notable support area prior to potential downside that could reach as far as 93.50, assuming this is not a bear trap/false breakdown. The US Dollar portion of NFTRH 765’s Currencies segment (including global currencies and Bitcoin) explained more.
Other notes pertaining to the below:
- The Gold/Silver ratio dropped hard along with the US dollar on Wednesday. That is a signal of stable market liquidity, among other things and would run in negative correlation with the inflation trades.
- Our thesis has been that commodities and inflation trades can play catch-up in a rotation from the Goldilocks (Tech/Growth) stuff if the US dollar tanks. But that does not necessarily mean those items would go bearish.
- When we discuss inflation trades, we are not projecting new inflation signaling (yet). The projection is that ‘Fed relief’ and US dollar weakness would lift those boats during easing Fed fears just as they impaired the inflation trades during high inflation and an emboldening hawkish Fed in 2022.
- As noted below, gold stocks, while bullish and now likely to put on a strong rally, are nothing special in this environment. Their best bull market one day will be when the macro falls apart into the mythical “post-bubble contraction” (PBC) for all the reasons stated previously and beyond the scope of this article. As you can probably tell, the macro is anything but post-bubble at this time.
NFTRH 765 Excerpt: US Dollar (July 9, 2023)
USD down, world of assets up on Friday. The buck (daily chart) bonked the first resistance level and fell below the SMA 50. The SMA 200 is sloping down and that is not technically a good thing. The history is a death cross in January and the obligatory hard move in the opposite of its implied direction in February-March. A tick to a lower low, a bounce to a lower high and now here we are. Frankly, the daily chart technicals are not good for USD.
Our thesis has been that despite the poor technicals, a rally can come about at any time if the markets liquidate. The Fed is trying to trigger that, but so far no dice. The market is flipping them and the buck the bird. Gold/Silver ratio (GSR) is a liquidity indicator and like other macro indicators noted above and all along these many months of the rally, it is calm. Recently I have increased my favorability toward inflation trades, and if GSR remains subdued, that prospect can remain in play.
The weekly chart shows how far USD could drop (within its intact bull market) if the support at 100 (+/-) were to be lost. That would-be target is 93.50, which would maintain a series of higher highs/lows from 2008.
Bottom line is that USD’s daily chart technicals do not look good, opening the door for a potential drop to 93.50, which would likely bring a big relief rally to commodities and other inflation trades (precious metals would tag along too, as the ‘death of the dollar’ bugs lather up). But if/when something breaks on the macro, all bets are off and USD would likely gain a classic liquidity bid. Watch GSR and other systemic stress indicators for clues (as yet, they are mostly sedate, with an eye on yield curves).
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In 2000-2002 the USD had three tops against the EUR, all after the market had popped. I think the market rebounded in Sep 2000 (bear market rally) but the USD reached its all time high against the EUR in Nov or Dec during the hanging chad mania. The highs in 2000-2 over about 15 months were lower than the preceding ones. The last was in Jan/Feb 2002 when the market was in really bad shape and Greenspan was cutting aggressively. He had not cut until around Jan 2001 just after the USD had peaked. Bernanke would later with his stupid grin smugly spout some boilerplate about a strong dollar. It started to fall in 2002 from a high of 0.85 in the winter. By July the EUR reached parity and by 2008 it was at 1.60 and I was in Brussels thinking that the situation was untenable and that 2.00 was in the cards. W’s treasury secretaries were pushing for a weaker dollar, I recall, after he gained power in 2001. Probably were pushing Greenspan to cut and he obliged around that time . The first secretary, forget his name, from Alcoa, was always pushing for a weak dollar because it would make the US more competitive in his view. (Imagine how competitive Zimbabwe was back in the day!) I hope my timeline here is accurate. All from memory……
So, I wonder how this compares versus today. One thing that I am thinking is that USD strength is far from over. A difference today is that we had real CPI inflation while Greenspan was maybe concerned about the market bubble and wanted to keep rates high, but they were not extremely high relative to past history as of 2000.
Interesting stuff. Thank you. I keep thinking about how, despite rampant inflation signals in the economy, commodities bent at the knees of Quixote-like fed, finally tilting at its inflationary windmill long after the problem was indicated to not be “transitory”. Despite raging inflation, the US dollar was bullish due to Quixote’s zeal. Now, with inflation signaling fading systematically, the currency market appears to thing that even the tardy Quixote will ease up, even if he does not quite know it yet. In other words, I think we have a mirror opposite dynamic to 2022 in play now with respect to inflation and the USD.
BTW, in the article I mistakenly wrote that the Gold/Silver ratio is in positive correlation with the inflation trades. Of course it is the Silver/Gold ratio that is in positive correlation. I fixed that error, to “negative correlation”.