forex market analysis

I’d have to say this is the first time in my entire trading career  where I’ve seen both the US Dollar and US equities rise together –  for such an extended period of time. The USD has been up up up some 25 days and running now – while stocks continue to grind higher as well. Something is obviously up.

The USD as well as the JPY are (under most conditions) recognized as “safe haven” currencies (as absolutely bizarre as that sounds) and as risk presses on and stocks move higher – these are normally sold. When risk comes off – flows head back for the ol USD as it is still the world’s reserve currency.

So are the big boys already building positions in USD in preparation for a larger correction/world event/news flash?

Looking at the calendar – I had planned to be in 100% cash as of the middle of March with expectations of such an event, and here we are….. only two days away. Obviously I can’t say for sure – but it would make a lot more sense to me that stocks would correct here as opposed to the Dollar. After this many days moving higher – we’ve got to see a little “zig” in that “zag” at some point.

So….with several open positions (small positions thankfully) I will likely plan to watch closely over coming days and even throw on a couple stops (which I normally / rarely use) in order to keep my self insulated from any “global disaster”.

Short of that…..perhaps things keep chugging along a while longer , and indeed the USD does finally make a turn down – and stocks continue there “blow off top”.

Trade safe here people. Market direction IS uncertain.

Lets start with the currency and work our way backward through a couple of charts to see if we can put this all to use.

The US Dollar continues to exhibit a pattern of “lower highs” coupled with the current fundamentals (the printing of 85 billion new dollars per month) suggesting to me – further downside is certainly in the cards. A lower dollar leads to higher prices in our commodities market right? – which in turn puts pressure on bond prices and interest rates.

(Short of looking at individual currencies vs USD specifically – $DXY will suffice for this example.)

The entire commodities complex clearly bottomed in June, and has taken a nasty pullback to an extremely solid level of support. As the USD rolls over – we can expect higher prices in commodities.

The $CRB after bottoming in June is now at support.

The symbol “TLT” tracks the price of the U.S 20 Year Bond. As the price for bonds falls the rate of interest paid rises (the price of a bond and its yield are inversely correlated).

20 Year Bond prices appear to be falling

Lastly in this wonderful chain of events we look at the SP 500 (or futures symbol /ES) and see that if indeed the intermarket analysis holds any water – a falling dollar creates  rising commodity costs, in turn leading to inflationary pressures pushing interest rates higher and bond prices lower – eventually spilling over ( as businesses begin to feel the pinch of higher borrowing costs) and lastly effecting equities.

SP500 Futures are nearing levels of resistance.

Now please keep in mind that these things don’t all happen “on the turn of a dime” – but all things considered it would appear that this is the scenario currently playing out in markets – as the dollar printing continues, commodity prices start to rise, bond prices turn lower (and interest rates higher) – and lastly we will see a reversal in equities.

I am still sticking with the timeline of late Feb to early March where I envision the stock market to start making its turn, as we can clearly see that the chain of events unfolding is leading us in that direction – likely sooner than later.

I don’t necessarily expect stocks to “crash” as we have to keep in mind that the FED will do anything in its power to keep prices elevated  – but as the forces outlines above begin to take hold – “sideways to down” looks far more likely than any type of rocket to the moon. 

Imagine if you will the “Global Commodities Market” much like you would your local farmers market. Vendors from far and wide, there with their goods on display and priced to sell. You’ve got corn, sugar, coffee, wheat, beef, gold, silver, copper, oil and even some live cattle there in the back. Everything a person (or a nation) could ever need, all there in tidy rows – neat and organized, ready to go.

Only thing is  – you’ll have to make a quick little stop to see me at the “foreign exchange window” before heading in……….. as you guessed it – all items are priced in U.S dollars.

With global trade in the trillions of U.S. dollars every year – and this “market” paying  taxes to the U.S. government. It’s a pretty good system for the U.S don’t you think? – Not to mention my little “currency exchange” on entry – (I’ll save this for another post and topic entirely).

The U.S. dollar and commodity prices generally trend in opposite directions. As the dollar declines (relative to other currencies)  the reaction can be seen in commodity prices.

Commodity prices have a direct effect on bond prices. As commodity prices escalate in an inflationary environment – so in turn interest rates rise to reflect this inflation. Rising interest rates and bond prices (TLT) fall. When bond prices begin to fall, stocks will eventually follow suit and head down as well. As borrowing becomes more expensive and the cost of doing business rises due to inflation, it is reasonable to assume that companies (stocks) will not do as well.

Putting this all together does take some time – but by monitoring even just the USD and the major currency pairs, a couple of commodities such as gold  or silver, the SP 500 and the 20 year bond (TLT) – the average trader at home should be able to get a handle on “what’s really going on”.  I spend my time in the currency window as I strongly believe that moves in other asset classes are first seen here – as the fx market is the largest and most liquid on the planet – dwarfing the daily volume of the NYSE by well over a 100 times.

We can look at a real world example next……..