Dollar Sentiment Weaker Than Ever – The Market Is Telling You To BUY

Everyone, especially our friends in the commodities community is strongly against the dollar as an investment right now. It seems that sentiment is at an all-time low and the forecasts that I am hearing are all suggesting a dollar collapse is near. Well, for the last five or so years, that has been the story, and every single time the dollar makes new 6 month or YTD lows, they all get on the bandwagon the same way the talking heads all say that gold is toast whenever it makes its respective YTD lows. I want to follow up on Thursday’s commentary and explain how things have developed in the euro and the dollar since I started covering them back when the euro began it’s rally.

THE DOLLAR IS A BUY

If I had gone short the dollar via UUP every time that people were saying that this was it and that the dollar would finally break down lower than 70 and the reserve currency status would be in question, I’d have lost a lot of money, or in the best case scenario, be close to breaking even.

At one point I was in the dollar demise camp and I still firmly believe that perhaps in the next 5-10 years, the dollar may see the last of its days. However I can guarantee that it is not going to happen now, or in the next 2-3 years at the very least.

I think that in the gold community there is a lot of anti-dollar pumping going on from funds and institutions in order to market their services. We are not by any means in good shape fiscally here in the US, but we are by far in better shape than other nations worldwide. In my humble opinion, the dollar collapse theme is extremely sensationalized and has worked well as a fear play to attract attention to the commodities markets. I believe that a lot of it is unintentional and because we live here and have to see firsthand how our leaders continue to enact anti-business and anti-capitalist policies, it can be easy for us to forget about how many advantages we have over other nations.

I’m still heavily bullish on precious metals and commodities, and I think that we have a global inflation problem, but my reasons have to do with the world’s desire to have a dollar peg and feed off of US monetary policy in order to grow their own economies in a way that they’d never be able to do otherwise.

Is there any analyst, trader, or speculator out there that can look you in the eye and say that the US is in worse shape than the EU?

Let’s review the technical patterns that I’ve been going over for the last 2 weeks.

Above is a chart that I showed last week of a shoulder head shoulder pattern forming in the euro index. From the get-go when Goldman recommended the Euro, I was skeptical of its overbought condition – 15 consecutive up days without convincing volume backing on FXE. The rioting that is going on, and the debt as a percentage of GDP is an extremely bearish fundamental for the euro, and the recent unresisted, gap-filled rally before stalling around $138 looks exactly like a classic topping pattern when fundamentals are lacking – especially when you throw in the fact that in doing so, it has formed the second shoulder in a long term SHS pattern.

Furthermore, FXE failed to complete an MACD crossover on the bullish side, and much more importantly, created a bearish engulfing candle over the previous week. An engulfing candle is something that I will never attempt to trade against and I believe that the price movement is justified with the fundamentals.

The Dollar Is Weighted 58% Against The Euro

The euro has been called the anti-dollar and considering that 58% of the dollar’s weighting is against the euro, that name has been a good fit for it. I am confident that one of the EU nations will encounter another sovereign debt crisis within the next 6 months to a year. They laid down temporary fixes for the problems they expierienced in 2010, and I expect them to continue to default by inflation. No one will want to hold euros when the United States isn’t hosting riots and emergency meetings to decide over defaults. As I stated earlier this week, I am predicting immediate strength in the dollar index, followed by additional long term strength. Of course, I don’t think the dollar index will go straight up. If we have defaults in the US (ie California), there will of course be a slowdown, but that isn’t going to have anything to do with the Japanese, Europeans, or middle easterners who are already pushed over the edge in debt and/or food inflation.

Again referring back to earlier this week, this is a chart I used to show the long term wedge in the dollar index. Nearly 5 lower lows and 2 lower highs (the top part of the wedge goes back further) make for a fairly large symmetrical wedge. Much like within the equities markets, I believe that QE is being misinterpreted in the dollar’s fundamentals. QE has been the driver behind the weakness in the dollar index though personally I believe that the fundamentals that QE brings shouldn’t be reflected so much in the dollar index as much as it should with emerging market currencies.

The economies with the least amount of circulated inflation (generally speaking) are the US, Canada, Japan, Great Britain, the EU, and Australia to some degree.

Whereas countries like China, India, Brazil, Egypt, South Africa, Russia, Turkey, Indonesia, and Saudi Arabia have, generally speaking the most circulated inflation.

However the correlation with the US dollar does not line up in a manner that I think is justified. The Canadian and Australian dollar have both outperformed the US dollar. The same goes for the Yen, the Pound, and recently, the Euro. These countries, along with the US are sending the inflation to the latter countries. I understand that QE comes from the US central bank, but if the final result of it is stagnant inflation in the US and rampant inflation in emerging markets, then it can’t make too much sense for the market to sell the dollar on QE when the market knows that all of the inflation is ending up elsewhere. This is why I say that the dollar is not only oversold, but the fundamentals haven’t even been realized by many on Wall St. and within the gold/commodities community. Remember, we can have inflation here, even hyperinflation, and the dollar could still outperform other currencies in relative terms if those currencies debase faster from either holding the dollar peg too long, or being forced to inflate to avoid default.

I’ll end my argument on this, an inflation heat map courtesy of the WSJ:

Advertisements

About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

One Response to Dollar Sentiment Weaker Than Ever – The Market Is Telling You To BUY

  1. Shane says:

    Thank you for writing the article.

    Curious if you know where we can see dollar sentiment charts? Which ones do you follow?

    I believe the DSI is costly but maybe there are others online and easily viewable.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: