Originally published on January 13, 2019 by TraderStef at CrushTheStreet.
In recent exchanges with fellow gormandizers, many are questioning or desperately holding onto historically reliable market correlations and divergences. When discussing technical analysis, its “rules” remain intact, but when attempting to quantify parallel outcomes between asset classes or currencies in today’s market complexity, you may be in for rude awakenings or hope for the good old days, depending upon your experience in the financial markets. In other words, expect the unexpected multiplied. While contemplating your expectations, do not ignore that the dollar has intermittently rallied and fell along with gold, and that the U.S. must sell trillions in Treasury bonds for sovereign debt going forward while demand slowly evaporates. The Federal Reserve will need to print more dollars to make up for the deficit, monetize more, and it will cause the dollar’s depreciating store of value to break below zero while its perceived value accelerates to the downside on dollar indices. Nothing is new under the sun except for how we eventually arrive there.
Here’s Where the Next Crisis Starts… “Each credit and liquidity crisis starts out differently and ends up the same. Each crisis begins with distress in a particular over borrowed sector and then spreads from sector to sector until the whole world is screaming, ‘I want my money back!’… First, one asset class has a surprise drop. The leveraged investors sell the sinking asset, but soon the asset is unwanted by anyone. Margin calls roll in. Investors then sell good assets to raise cash to meet the margin calls. This spreads the panic to banks and dealers who were not originally involved with the weak asset. Soon the contagion spreads to all banks and assets, as everyone wants their money back all at once. Banks begin to fail, panic spreads and finally central banks step in to separate winners and losers and re-liquefy the system for the benefit of the winners… That much panics have in common. What varies in financial panics is not how they end but how they begin… Many investors will be caught completely unprepared. Once the tsunami hits, no one will be spared. The stock market is going to collapse in the face of rising credit losses and tightening credit conditions.” – Jim Rickards, Jan. 8
Fragile Markets On The ‘Edge Of Chaos’… “Patterns of correlation between major asset classes: Bonds and equities have been negatively correlated in last few decades. From here on they can are likely to be positively correlated. A change in correlations in major asset classes is worth watching in a complex system held at the edge of chaos… When analyzed through the prism of complexity theory, today’s markets exhibit the signatures characteristic of criticality, lack of resilience, flipping feedback loops and likely proximity to critical tipping points. In other terms, markets are unstable.” – Fasanara Capital, Jan. 10
When asked if I was bullish or bearish on the dollar this past week:
“I am indifferent to its direction. Trade decisions based on dollar divergence or correlation is not the best strategy in recent years but is dependent upon the comparative asset in question, however, the usual associations no longer apply as per the charts, especially shorter-term.” – TraderStef, Jan. 10
The elephant treading under the radar of current market instability is a global currency reset that is underway. Currency will always be available for general commerce, but gold and silver are the only safe havens and stores of value amidst the chaos. Russia is just one of the players positioning for checkmate with de-dollarization. A flood of near-term geopolitical and economic factors is creating congestion in the news pipeline that will soon have a negative or positive impact on the dollar index. Here are a few to consider.
This FX Veteran Predicts the Dollar Will Plunge… “Ulf Lindahl, who hedges foreign exchange risk for pension funds and family offices in the U.S. and Europe, forecasts a decline of 40% against the euro by 2024. Here’s why.” – Bloomberg, Oct. 2018
Ditching the U.S. Dollar Emerges as a Popular Call for 2019… “Strategists in the $5.1 trillion-a-day currency market are gearing up for a slumping dollar next year, while pinning their hopes for 2019 gains on the yen. A major driver of the dollar’s decline could be a downturn in the U.S. economy, especially in the second half of the year… Others expect the Federal Reserve to slow down interest-rate increases, which they see as bearish for the greenback. Rising market volatility and capital demand abroad will also spur an outflow of funds from the U.S.” – Bloomberg, Dec. 2018
EU Proposes Widespread ‘De-Dollarization’ Initiatives… “In the most blatant and transparent reaction to Washington’s continued vassalization, the European Commission has reportedly formulated a plan to reduce the role of the dollar in international trade.” – ZeroHedge, Dec. 2018
Russia Buys Quarter of World Yuan Reserves in Shift From Dollar… “Russia dumped $101 billion in U.S. dollar holdings from its huge reserves, shifting into euros, yuan, and yen… according to a report published on late Wednesday by the Bank of Russia, which discloses data with a six-month lag… The data reveals a dramatic acceleration in a policy Russia has been pursuing for several years. Russia is not alone in its bid to reduce reliance on the world’s reserve currency…In a deepening trade war with America, China sold a large portion of its U.S. Treasury holdings last year and officials in Europe put forward proposals to increase the use of the euro in regional transactions… Russian President Vladimir Putin said in November that ‘the instability of dollar payments is creating a desire for many global economies to find alternative reserve currencies and create settlement systems independent of the dollar. We’re not the only ones doing it, believe me.’” – Bloomberg, Jan. 9
Political Nightmares Multiply for Europe Ahead of Davos… “Europe’s dreams of integration are slipping away as the people wake up from the nightmare erected for them. As we approach Act IX of the Yellow Vest protests in France and the threats of creating bank runs we get the news that both Presidents Trump and Macron will not be attending the convocation of globalists known as the World Economic Forum at Davos.” – Tom Luongo, Jan. 11
War-Gaming the Pound on Brexit Vote Suggests More Wild Rides – Bloomberg, Jan. 12
I was unable to locate a blog-friendly, embeddable version of the following interview. It offers great behind-the-scenes insight into the political dynamic playing out over the upcoming Brexit vote in the U.K. Parliament next week. The eventual outcome will influence the euro, pound, and U.S. dollar. U.K. House of Lords Member Digby Jones and Chatham House Chair Jim O’Neill discuss Prime Minister Theresa May’s Brexit deal and the prospect of a general election or second referendum on Bloomberg.
What is the Fed likely to do with monetary policy going forward? If the Fed follows through with a dovish stance in 2019, expect the dollar to pay a price to the downside due to the loss of confidence taking place in its safe haven status. Here are my two cents with “Fitch May Cut U.S. Credit Rating as the Fed Stutters and Gold Advances” and an excerpt:
“U.S. economic data metrics are deteriorating across the board as we approach the final months of a business cycle on the heels of a slowing global economy. If recent volatility in the stock market is any indication of what 2019 has in store for Main Street, the weakening global economy will put a final fork in the 10-year pig party and any hope for further U.S. economic expansion will grind to a screeching halt. I would not be surprised to see headlines on the news ticker saying that the Fed calls an emergency meeting after an additional 10-20% plunge in equities. A halt to Quantitative Tightening and the raising of interest rates will likely occur in a step-down fashion so as to not create panic in an already precarious situation.”
It is time for a technical analysis update on the USD. To view a larger version of any chart, right-click on it and choose your “view image” option. First, consider the USD Index Futures as of Jan. 11, via Barchart…
Here is a monthly chart and an excerpt from my analysis “The USD – Having a Dead Cat Bounce, or is it a Breakout?” from Apr. 27, 2018.
“Beginning in Feb. 2018, the lateral drawn from the 2008-2010 highs met the 61.8% Fibonacci (2014 low – 2017 high) at $88.42 and formed a confluence of support. The 21, 150, and 100 Exponential Moving Averages (EMAs) are also contributing to the support on this monthly. A potential Dead Cat Bounce is brewing. A decisive breach of the overhead 50 EMA would lead to further upside price action, breaking the current bearish downtrend… Despite the recent rally, I remain bearish but neutral near-term until the 50 EMA on the monthly is breached decisively to the upside and the Death Cross and secondary downtrend line on the weekly are taken out with strong upside candlesticks…”
USD weekly chart as of Jan. 11, 2019 close…
It is a busy chart, so let’s break it down. There is a bearish Head ‘n Shoulders pattern within a Broadening Top drawn back to the 2015 high. As noted on the Apr. 27 analysis, a breach back above the 50 EMA has occurred on the monthly with a pullback (reversal in price to the upside as per a Broadening Top playbook) back above the Head ‘n Shoulder neckline (Broadening Top lower trendline), as seen on the weekly. The price advance in this pullback is the potential Dead Cat Bounce mentioned in the monthly analysis.
On the weekly, I include both the 50 Exponential Moving Average (EMA) and Simple Moving Average (SMA) in order to highlight that the 50 SMA created a bearish Death Cross over the 200 SMA (not shown) despite the pullback (rise) in price, but the 50/200 EMAs did not Death Cross, and it was ultimately a more accurate near-term predictor. As the pullback continued, a trendline of support drawn back to May 2018 developed, which is the first line of support below the current price. The price has fallen for the past four weeks and printed a $95 low on this week’s candlestick, right on top of the 50 EMA and just above the 100 EMA. The price was unable to close back above the 21 EMA breach from last week. The Jan. 11 close was $95.66.
Take note of the two Fibonacci confluences that multiply resistance and/or support strength. A Fib confluence at $94.19 and $94.30 sit just below the 50 & 100 EMAs, and the trendline and 200 EMA are the next support level at around $94.
The DMI-ADX is breaking down into negative territory, while the StochRSI is already there and bottoming out. The StochRSI can remain and bounce along in an oversold condition for an extended time period. The MACD has slightly crossed over to the negative, and the black histogram has printed a bar to the downside.
The USD chart is a tough call due to the coalescing of geopolitical, domestic, and global economic factors that may weigh heavily upon the dollar’s price action and perceived safe haven reserve status. The USD may kneejerk back into the uptrend based on news flow, but not for long as the world is fleeing the dollar hegemony. When such a confluence takes place, it is prudent to focus on the chart and ignore fundamentals or news-driven volatility. With that in mind, here is a Broadening Top example of what is occurring on the current USD chart, courtesy of ThePatternSite.com:
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