With more than a handful of general indicators already suggesting “a top” – it’s important for investors to understand what “exactly” is happening. And I don’t mean with the “price” of U.S stocks” – I mean with investor sentiment and physcology.
You don’t really want to hear this from me….(not here…not now – with your neighbor and half the guys you know down at the pub all “ranting n raving” about how much money they’re making in the market) as the temptation to “jump in with reckless abandon” is near impossible to resist.
They “say” they’ve been making money but the sad fact is…..mindless bulls are now dropping like flies, with nothing more to go on that “the Fed’s got your back”. Hot shot stock traders caught flat footed, completely oblivious to the movements in currency markets are “feeling some serious pain” as “the grind across the top” takes no prisoners.
It won’t be long now, as everything I track “other” than the misguided euphoria playing out in U.S equities already has me on the move.
If you “don’t know” what I’m looking at by now “from a currency perspective” – I encourage you to give it a shot. It’s all here.
What do I see – that perhaps you don’t?
The Currency Signals Everyone’s Ignoring
Dollar Weakness Hidden in Plain Sight
While retail traders pile into meme stocks and chase momentum plays, the dollar has been quietly bleeding out against every major currency that matters. The DXY might not be screaming headlines, but look closer at EUR/USD, GBP/USD, and especially AUD/USD – they’re telling a completely different story than what you’re hearing on CNBC. Smart money isn’t buying dollars here. They’re dumping them. And when I see consistent dollar weakness across multiple timeframes while stocks grind higher, that’s not coincidence – that’s capital flight disguised as optimism. The Fed’s liquidity injections aren’t creating wealth, they’re devaluing the very currency those stock gains are denominated in. You think you’re getting richer? Check your purchasing power against commodities, against real assets, against anything that isn’t priced in increasingly worthless dollars.
Carry Trades Unwinding Faster Than Expected
Here’s what your stock-picking buddies don’t understand: the massive yen carry trades that fueled this entire rally are starting to reverse. USD/JPY has been the backbone of risk-on sentiment for months, but watch how it behaves during any meaningful equity selloff. The correlation breaks down fast, and when it does, leveraged positions get liquidated in a hurry. I’m seeing early signs of this unwinding in the crosses – EUR/JPY, GBP/JPY, AUD/JPY – all showing weakness when they should be strengthening if the “everything up forever” narrative held water. The Bank of Japan doesn’t need to hike rates to kill this party. All they need to do is hint at policy normalization, and these overleveraged carry positions will unravel themselves. Currency markets are already pricing in this possibility while equity markets remain blissfully unaware.
Commodity Currencies Telling the Real Story
Pay attention to the Australian dollar, the Canadian dollar, the Norwegian krone – these aren’t just random currencies, they’re direct proxies for global growth expectations and commodity demand. While tech stocks party like it’s 1999, commodity currencies are showing serious divergence patterns that spell trouble for the reflation trade. AUD/USD should be screaming higher if global growth was as robust as equity markets suggest. Instead, it’s consolidating near resistance levels that tell me institutional money is skeptical about sustained economic expansion. The same pattern emerges in USD/CAD – oil prices holding steady but the loonie can’t catch a sustainable bid against the dollar. This disconnect between commodity prices, commodity currencies, and equity markets is textbook late-cycle behavior. Something’s got to give, and it won’t be the currency markets that blink first.
Central Bank Divergence Creates the Setup
The real money is being made by traders who understand central bank policy divergence, not by retail investors chasing the latest stock tip. The European Central Bank is still years away from meaningful tightening, the Bank of England is trapped by inflation but can’t hike aggressively without crushing their economy, and the Federal Reserve is caught between inflation pressures and an overleveraged financial system that can’t handle normalized rates. This creates massive opportunities in currency pairs that most people never even consider. EUR/GBP, for instance, reflects the policy divergence between two central banks facing completely different constraints. Meanwhile, emerging market currencies are offering value that won’t last once the dollar’s decline accelerates. The Turkish lira, the South African rand, even the Mexican peso – these aren’t just exotic trades, they’re strategic positions for when capital flows reverse direction and investors remember that currency movements drive everything else. The setup is obvious once you stop focusing on daily stock price movements and start thinking like a macro trader.
Hey Dr. Kong….. take some risk trades on here…. largest position however long AUD/USD here….. even for a short period…. but I think it’s there…
Interesting how the scales tip as…..
AUD been falling here as “risk rises” ( or at least as seen via SPY ).
I’m focused on JPY here short term with finger on the buttons as always.
AUD / USD looks good for a short term bounce for sure….”risk on though??”
Not so sure.
Yeah we will have to see….. the great thing is we all have the time… LOL…
My 30min tech on the above pair tell me there is some low hanging fruit to be picked…. the 1hr is just setting up now….. after that there is now much happening….. the 30min & 1hr will set up the later TF for my next execution….. cheers Doc!
JPY strength across the board as money flows back into Japan out of US equities. I think your looking at this perhaps still as a possible trading plan? Or in other words a “Risk off trade” withthe yen being the main Safety?
AUDUSD long here? Seriously? If there is a bounce today, it’s only because the US are off. USD is going north I think.
confuse .. confuse here. i already short aud against usd. Hope i’m right here to sell around the horn. SELL me A/U.
The majority of your flock doesn’t see what you see matey, it’s why we read every word you write, it’s why you have an avid following and it’s why I only need 2 indicators. Kong and the RSI ?
PS. I gave it a shot like you said,
Do you see daily $index under lots of downward pressure.
Do you see the daily emini s&p 500 with a rough double top with failing volumes?
Do you see the commodity price index heading north out of the oversold zone.
Have I interpreted this as an investor confidence issue correctly with all that’s being going on. Risk off to follow?
Your thoughts on my analysis would be greatly appreciated Kong as it’s the first time I’ve “had a go” at connecting the dots.
Many thanks.
Fantastic Andrew, lets have a look.
1.$ Index – After this huge move up to 81.50 the weekly trendline / downward action still intact, and daily could easily roll over soon. Take note of the 200 MA on that daily 81.50 to 8175 area…..a tough nut to crack.
2. SP 500 certainly “pushing the limits” up here on “continued low volume and now “diverging RSI” where price reamins about the same, but the indicator bumps lower each time.
3.Commods hit so hard over the past year, with very little liklihood of much more downside ( zooming out to a weekly chart in $CRB ) a massive double bottom would be there at 270 area.
Bang on, bang on and bang on for 3 out of 3 – Bravo!
So all things said…..could we wrap our heads around the general idea that the USD heads for the toilet, as the price of things ( commods ) inversely move higher…and those who choose to grind it out in equities can zig / zag / push / pull / as stocks continue to eat people’s accounts for breakfast for the next few months ( with a significant downward bias )? Then announcement of further QE ( maybe a doubling ) with a corresponding bounce in equities / risk before rolling over into full blown panic late 2014 – into 2015?
Just thinkin out loud.
Great work man.
Thanks mate you’ve made my day. I’m buzzing.
If you aren’t already ( and for fun ) grab a chart of the Nikkei ( futures symbol /NKD ) grab a crayola and get a trendline drawn under the lows on daily…or even zoom and get it on 4H.
I’d say the dip / low 3 days ago breached that..and now a lil “back test” up from below?
Zooming out further…..the high in May ( my top ) and the subsequent “grind ever since”.
Yes it looks like a symetrical triangle but for it to resolve upward?? I dunno…..
Come on Yen strength, I want to buy the USD/JPY on the cheap for a longer-term trade. Still patiently waiting.
Aside from that, the EM’s are getting beat to hell and are looking attractive for those brave enough to give up some margin and hold through the storm until we have confirmation the US won’t taper in December. But who knows, maybe they will. Either way, I’ll be collecting my high yield everyday and building a medium term position.
Level headed David – looking good.
Ya common JPY! I want long term buy n hold USD/JPY too!
It will come, I’m confident of that.
Interesting the news flow as of late being that of “EU now set to join currency war etc”….as well I’m quite confident Japan will INCREASE QE in April so…..the U.S will need to “stay in the game” via further easing too.
I can’t predict what they “say they’ll do” but… looking ahead I can’t see any other option than to dramatically increase QE.
Keee on rockin man!