Why the US Dollar is About to Go Up, and the Euro Isn’t.

With $DXY’s 92.63 monthly close, August 2017’s end likely marked an 8-month high-to-low cycle for the US Dollar – which hovers a mere penny above major support at 92.62 (next major support ~ 91.92).

92.63

That’s where the Dollar ($DXY) closed the month of August.

A full 0.01 above major support at 92.62.

The Dollar’s been hammered for 8-months straight.

It’s gone down for all of 2017.

Yeah, it bounced in February - c’mon.

After an 8-month high-to-low time cycle that shaved off 11.75% (peak-to-trough), the US Dollar appears poised to find its footing and bounce markedly from a cluster of strong price support spanning 92.62 - 91.92 (note $DXY price action and weekly candlesticks across the last few weekly bars of 2014 and first few of 2015 ~ extremely strong support range from massive technical breakout).

Technical Outlook for the US Dollar ($DXY)

~ why it wants higher from here

The combination of a strong 8-month selloff – that ends in a picture-perfect doji, 1 penny above the first major support level going back to 2015 – suggests that a strong bounce is more than likely to develop over the next few months, with 95/96 $DXY the likely target (round number 100 is a longer-term possibility and a floor to absolutely trampoline through 103 if  Big Lil’ Kim launches an EMP that ‘fails’ over Hokkaido/ Sakhalin.

The daily chart below shows the US Dollar with the Super RSI, Super MACD, and Super DMI – it’s worth noting that all four of these technical indicators are showing a clear-cut bullish divergence. This is because every indicator is registering a higher value even though the price of $DXY printed a new swing low.

The following chart shows the exact Pip Strength of individual currencies … 

(EUR, GBP, USD, JPY, CHF, CAD, AUD, NZD)

… over the last 8-months ~ the timespan when the USD registered it’s last major swing high.

Over this period of time, the USD has been the weakest currency when we tally the total amount of pips lost since January 1st. 

Working from the assumption (albeit measured) that the USD is about to turn up …

what may prove itself the best currency pair trade, from the perspective of technical risk:reward?

EUR has been the strongest performing major currency (represented via Cyan below) but appears ready to cool-off, lose its lust for the luster of 1.20 and turn south (after explicitly failing to plot a new swing high).

i) Looking at a EURUSD monthly chart shows that the open gap from January 2015 has just been filled (to within roughly 20 pips), and

ii) While the 1.2100 level has provided rock-solid support on numerous occasions, we’re now on the other side of it ..

iii) Meaning that same level will likely serve as resistance now – because price is approaching it from below instead of above.

[1] http://www.zerohedge.com/news/2014-07-29/most-significant-danger-according-elliotts-paul-singer

[2] http://www.zerohedge.com/news/2017-08-04/epic-quarterly-letter-elliotts-paul-singer-rages-against-everything-passive-investin

Bank of America: "Tick Tock"

The drums of doom from BofA"s Michael Hartnett (most notorious for his recent prediction of when "the Fed will crash the market", and warning that "The Most Dangerous Moment For Markets Will Come In 3 Or 4 Months") are beating louder, and in his latest Flow Show report titled "Tick Tock", he doubles down on his recent forecast that "positioning is becoming more consistent with autumn top in risk assets", but more importantly than just making a forecast, Hartnett lays out the key catalysts that would confirm an imminent market "crack": a dollar swoon (DXY < 90), unambiguous US labor/consumer weakness (payroll <100K) and flatter yield curve.

In terms of recent market moves, Hartnett points out the euphoria still is prevalent, with BofA"s proprietary Bull & Bear indicator now 7.6, edging up toward "sell" level of 8...

... now just shy of euphoria territory:

... as "active" equity funds have seen the biggest inflows since 2014.

So why "tick tock"? Below, Hartnett lays out his negative views, familiar to those who have been following his "Icarus" thesis which expects stocks to surge in the summer, rising as high as 2,600 before tumbling:

Positioning becoming more consistent with autumn top: Bull & Bear indicator now 7.6, edging up toward "sell" signal of 8 (trigger = further strong inflows to HY, EM debt, active equity plus drop in FMS institutional cash); private client cash levels at record lows.

Disobedience of central banks: stocks rally in defiance of Fed"s promise to reduce balance sheet (Chart 2); central bank disobedience classic euphoria signal.

 

Little fear of Fed: balance sheet reduction likely Sept 20th not leading to higher rates/yields as QE has not led to inflation; latest core inflation rates likely lowest most investors have witnessed in their careers…-0.4% in Japan, 0.2% in Switzerland, 1.1% in EU, 1.4% in US, China, India & Canada.

Little fear of Humpty-Dumpty: investors replacing "Icarus" skepticism with skepticism over "great fall" in markets H2; negative surprise for investors now more likely weak GDP/EPS than Quantitative Tightening.

Lodestars: sharp weakness in US dollar (6-month decline of DXY biggest in 6 years) maybe harbinger weaker H2 activity; but yield curve needs to flatten another 50-75bps to incite narrative of yield curve inversion, recession (Chart 3)...

... wider spreads, higher volatility (Chart 1).

Finally, this is how to know that the "crack" moments have arrived according to Hartnett:

August crack: we have penciled in autumn top; August crack in markets requires dollar swoon (DXY to 90) to coincide with unambiguous US labor/consumer weakness (payroll <100K) & flatter yield curve; end of "high yield" leadership should be early warning system, as would fatigue in equity "growth" leadership (QNET, EMQQITR, SOX).