Decision Time For The Dollar

Published on: July 21st, 2017

Raoul discusses the risks and opportunities of his view as the dollar approaches the make-or-break point…


  • PG
    Paul G.
    29 August 2017 @ 07:51
    Any update re USD?
  • NW
    Neev W.
    25 August 2017 @ 19:25
    Raoul- weekly close below 93 in DXY changes USD opinion?
  • NB
    Neil B.
    6 August 2017 @ 18:48
    Hi Raoul, In addition to the comments/questions I posted below I am curious on page 11 of this piece you state that the Shanghai Composite Index "looks set to fall again". I realize the macro thesis you stated is related to the underlying debt problems in China and commodity pressures which still persist. However, in terms of the equities market as conveyed thru the Shanghai Composite price action, I am curious what you are basing the call that it looks ready to fall? There is an uptrend Feb 2016 still in tact and we've yet to see a break down of that larger uptrend. I see a rising wedge from 11/2016 to 4/2017 which had negative divergences in place on the MACD / PPO and RSI and subsequent price action break down form there but, since then, price has stabilized and recovered upwards beyond that rising wedge break down and recently is rising up towards a potential back test of the underside of that rising wedge extension. Coincidentally we are right at what might be a potential triple top in price action at the 3292 level. And I don't see any strong divergences in place as of yet so there appears to be bullish momentum in tact still. If price breaks above and sticks an objective case can be made for price to rise up in towards the next major resistance area at the 3432 to 3666 area. Economic data from China also seems to be supportive. So we are at somewhat of a pivotal point on the price chart and just really curious what else you are seeing to make the case for the Shanghai Comp topping out here? Is it in context of a larger global risk off scenario which seems to be elusive for so long? Or other technical developments you see when looking at the chart? Thanks
  • EL
    Elizabeth L.
    1 August 2017 @ 19:39
    Question: Has anyone else been unable to access the vimeo video Raoul has given us? If you have been able to access, could you please give some brief instructions. I did a cut and paste into google. Also tried to access on the vimeo website with a search no luck. Thanks.
    • MM
      Michael M.
      3 August 2017 @ 05:25
      See if you can copy and paste it in the browser's address bar. Works in both Safari & Chrome for me. Here is the plain text of the link:
    • MM
      Michael M.
      4 August 2017 @ 02:09
      There are 4 short videos by them here -> The "How I use Charts" video is the one you are looking for. There are also "How I Manage Time Horizons"; "How I use the Dollar Cycle" by Julian and together " How to Use Macro Analysis to Gain an Edge"
  • NB
    Neil B.
    31 July 2017 @ 00:29
    RAOUL: Questions posed below. Thank you for the piece. I have also been anticipating US$ continued strength and you make some great cases for it. As well if/when we have a more notable ( actual ) equities market correction I feel US$ will rise due to the liquidity dash. The current DXY corrective action seemed to me like a head fake before a more rapid rise into some more meaningful equities correction / risk off environment. Taking a look at a longer term price chart on the weekly and following along with plotting the channels I reference in the forthcoming will help in following along. However, one thing that gives me pause with the most recent part of that decline, using the 1992 to 2002 ( 10 years ) as a historic bull $ price action allegory, is that in that prior bull run which ran within an upward sloping long term price channel during the last 2 years of the run price action never declined below the middle line of the price channel. But once it did ( in June of 2002 ) it marked the end of the DXY bull run. Turning back to current bull run, price action from 2008 till current 2017 ( 9 years ) has also remained within a very similar rising price channel and until during the past 1 1/2 years of that run price action also has never declined below the middle line of the price channel but over the past month it HAS broken below that middle line in the price channel and appears to be "sticking" beneath it. Prior to this solid break of the middle line in the channel I was targeting the price action to continue along within the upper half of the price channel towards the top of the much longer term down sloping price channel at around the 110 price zone stretching back all the way to 1986. That would have segued nicely the objective potential pattern allegory I was making based on the prior DXY bull run which also hit the upper end of the longer term downward sloping price channel ( back then it was in the 120 price zone ) before the bull run had the potential to stall out in a major way or finally end. However, turning back to my earlier point about the last month's worth of price action the thing that give me major pause now with this price action allegory is the fact that we have now broken beneath the middle line of the upward sloping price channel. Again THAT type of occurrence ENDED the prior DXY bull run. Of course it's just an allegory but just something that sticks out to me at this stage. Additionally, ( on the more supportive side of the coin ) it seems to me even if DXY continued lower beneath the 92 zone that there is some pretty strong price support in the 88 to 90 zone. A similar price support zone look also occurred back towards the end of the last DXY bull run around the 102 price zone and, although DXY paused at that area in August of 2002, by the end of 2002 it sliced thru it and kept on going. So this past month's action really has caused some damage I'd say ( at least based on prior allegory ). So, would be interested to know your thoughts on this allegory and similar actions between them and also how you feel about that 88 to 90 price support zone which is slightly below your 92 stop zone? One other thing I've noticed is that precious metals, despite fairly severe US$ weakness are not near as strongly higher as I would have expected them to be with such US$ weakness. This has also made me question the DXY decline in that if it's "for real" and indicative of lack of confidence in the USD$ and it's future rise, why have precious metals not performed much stronger to the upside during this period? As far as the RSI positive "divergence" you are seeing on the daily which you noted in this piece. I'm curious how strong a divergence you really feel that is considering the support trend line you showed is actually down sloping. Granted it's a relatively shallow downslope compared to the corresponding price action but it's still down sloping. When I look for positive divergences I classify them as positive when there bottom trend line is slanted up while the corresponding price action is sloping down. Additionally, if you look at the PPO ( or MACD ) on the daily, it's looking quite weak with no inkling of a positive divergence as it's bottom trend line is quite steeply sloping down. Would be nice to get your feedback on the "positive divergence" call you are outlining on the RSI in context of all this so we can understand better your perspective? Thank You.
  • MM
    Michael M.
    28 July 2017 @ 17:45
    Neil Azous' overnight conversations with institutional investors on the dollar produced the following reasons for current USD weakness (or why they are not buyers) (7/28/17). - The news flow over the last 24 hours argues there is no basis for fading US dollar weakness or calling for a counter-trend bounce outside of something technical. Below are the anecdotes weighing on US dollar sentiment overnight. FIRSTLY, yesterday, the tax "Big Six" – House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Treasury Secretary Steve Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch, and House Ways and Means Committee Chairman Kevin Brady, released a joint tax statement. The Republican leaders, for the first time, conceded that a centerpiece of the House GOP tax plan —raise $1 trillion over 10 years by hiking taxes on imports and cutting them on exports – is no longer viable. Here is the key passage: "While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform." By February 1st of this year, the consensus view was that if a Border Adjustment Tax (BAT) was included in the tax plan that it would lead to at least a 10%, if not 15%, appreciation of the US dollar. That concept, even if it was just a 5% probability by the end of second quarter, can now be completely removed. SECONDLY, in that same statement, the market learned that Republicans are designing a plan that does not raise deficits outside of the 10-year budget window. So, unless evidence grows in the autumn that Congress is setting up to extend the budget window (i.e. “deficit building” like President Trump wants), replace the CBO with a more aggressive budget scorer, or kill the filibuster, then fiscal stimulus is a lot less likely, or smaller. While the Federal Reserve has never explicitly linked President Trump’s agenda and fiscal policy to the prospect of raising interest rates, on the margin, this is a dovish development and leads to less interest rate hikes in this cycle. That is bearish the US dollar. Regarding the first and second anecdote, while the degree of importance or what was discounted could be debated, what is important is that in both cases, this is a new developments or piece of information for the trend in the US dollar. THIRDLY, there is no advancement on the health care bill. This lowers not only the scope of tax reform but the net present value (NPV) of the potential size on account of having less flexibility to pay for tax cuts. It is no surprise that the bracket of 15-25% tax rates for a corporation just became 25-30%. FOURTHLY, there is no abatement in the negative sentiment, or linkage between the US dollar and President Trump. While we believe that the sentiment around the internal White House chaos and President Trump is at an extreme, the market is learning that with the hiring of a new Communications Director, that it may get worse, before it gets better. FINALLY, the European growth and inflation data was strong, again. In that spirit, Eurozone stocks are again succumbing to euro strength, or data that portends to a faster monetary tightening path.
  • sB
    sylvain B.
    28 July 2017 @ 06:53
    Your bullish UsD view rely mostly on US economic weakness ahead which is hardly seen at the moment. also massive Flow have been done by EU investors into US bond hedged at around 1.10/1.12. Those positions are at loss and will be likely hedged at least. That could create upward pressure on the EUR which is undervalued by about 15% on most econometric models. Bottom line the low for the year have likely been seen in EUR with a growing risk of overshooting in month ahead
    • JB
      Julian B. | Contributor
      28 July 2017 @ 15:59
      Hi Sylvain, I don't want to put words into Raoul's mouth but if I may I'd be careful of using the EUR as a metric for the $. That's especially the case of the current rise, which is primarily being driven by a correction in perceptions around the European growth/inflation story. Given that backdrop yes EURUSD rallies and the DXY falls (essentially 65% Euro) but you need watch the Euro crosses. In the spring of 2015, we also saw a rapid rise in EURUSD as Bund yields exploded. Initially, the broad $ weakened but then turned as higher Bund yields and EURUSD crushed the DAX. This created a broad risk off event with both stocks and bonds falling. Yes EURUSD was higher but vs EM and commodity currencies the $ was also higher. Indeed, EURNZD rallied 40%. Moral of the story. Not all dollars are created equal!
  • DB
    Daniel B.
    26 July 2017 @ 16:11
    Great Piece!
  • MG
    Miguel G.
    26 July 2017 @ 11:54
    Nice piece Raoul. A few thoughts I also agree with your view on interest rates but am expressing my thesis by being long silver and gold. Have you seen spec money positioning in 2 year treasuries? Longer than they were in 2007 which not only marked the peak in rates but the bottom in metals. Along with inflation not bottoming to at earliest Q1 2018 and similar positioning like we saw in 2007 I completely agree that the fed is setting the stage to begin their pivot back to dovish. Do you agree with metals being another way to play lower rates. Julian sees the dollar making one final move higher, but I actually see a scenario where metals and dollar can coexist. Thoughts and thank you for making this service available, LOVE IT!
  • RM
    R M.
    25 July 2017 @ 15:52
    Excellent and interesting report. I put on a very small YCS trade at 72.32 after watching the also interesting Hendry video and also seeing YCS appear oversold. Working so far, but I don't have a lot of conviction. After watching a lot of RV, it appears what happens in China first, and India second are critically important to what happens in Macro, yet China is mostly a dark hole of info. My question: How can we find China macro data that can be trusted?
  • gg
    gurdeep g.
    22 July 2017 @ 06:59
    Interesting that Nautilus 2002 DXY analog compares well with this years. Suggesting further fall. However given the small risk ,Ive taken a small position here
    • jj
      j j.
      23 July 2017 @ 22:29
      The thing about chart overlays is you can use it on anything and it looks like it works as long as you control the start period and end period. Both Raoul's and Nautilus's overlays are valid, and I'm sure many other periods can be overlayed that look correct but it's really a crapshoot without any fundamental analysis and reasoning behind it. IMO I don't think Nautilus's makes sense with 85-87 as a recession/market blowup will send dollar through the roof as in '08 - albeit temporarily - until the next wave of QE
    • gg
      gurdeep g.
      24 July 2017 @ 20:45
      Some good points. Listened to the recent Hugh Hendry interview on my way to work. Both him and Raoul have great arguments for going long USD/JPY for very different reasons. To bring Nautilus in, they recently posted up a nice overlay of a 2012 bullish thesis. Nice bull flag developing in the meantime. Watch this space
  • AM
    A M.
    23 July 2017 @ 22:03
    Although not undermining the potential for this trade I wonder if Raoul has given any weighting to the move away from pricing a lot of world trade in US$. I recollect a few bilateral deals on oil for instance. These moves away from the $ will have at least some effect on what has happened previously. Is there any quantified research to try and estimate the extent to which this is happening?
    • KO
      Kasparas O.
      23 July 2017 @ 22:35
      Interesting thought however I would argue there is a timing mismatch. The move away from $ will take many years to play out and the current positioning (Short $) is a lot more short term. There is also the risk of the global $ flows and the interest rate differential (EURO being a negative carry v USTs) which would trigger a re-positioning if economic data starts slipping. Not sure about the research on de-dollarization as its a fairly recent phenomena...
  • SR
    Steve R.
    23 July 2017 @ 21:18
    This is a tricky one. Nautilus Capital have the EUR on the verge of a potential massive break north - which is obviously a big negative for the USD. Just the slightest whiff of a rate rise in Europe will send the EUR flying higher, and with the confirmation last week that the issue will be discussed in the autumn means to me the EUR is likley to keep rising up into the autumn at least. I also think some of the past long term correlations may not hold true going forward, but this is just my personal opinion. Being long the USD is definitely the contrarian trade at the moment. For the moment I'll sit on the sidelines and watch it play out.
  • jj
    j j.
    21 July 2017 @ 16:39
    Not too familiar with DeMark indicators so I'm guessing here but at the current rate of dollar weakness, wouldn't another 4 weeks for a DeMark 9 count completion invalidate the weekly close below 10% and vice versa?
  • JM
    Jim M.
    21 July 2017 @ 14:29
    Another lesson in Raoul's process.