In February 2018 I expected the Dollar to rally by more than 8% as the U.S. economy improved in the second quarter. Technically, only 10% of currency traders were bullish the Dollar and hedge funds had amassed a large short position in the Dollar. A Dollar rally of that magnitude was likely to result in a decline in Emerging Markets. As the Dollar rose by 10% between February and August 2018, Emerging Market Local Debt (EMLC) and EM equities (EEM) declined by more than 15%. In March 2017 and May 2018, Treasury yields were forecast to go up by most economists.
Dollar and Euro – I expected the Dollar Index to rally from 80.00 in March 2014 to 101.00. In January 2017 I expected the Dollar to decline, which was expected to boost Emerging Markets (EM) and Gold and Gold stocks. In March 2018 I forecast the Dollar Index would rally from 89.00 to 95.00 and hurt EM.
In April 2014 Jim anticipated the 25% rally in the U.S. Dollar Index from 80.00 May 2014 to over 100.00 in March 2015, and its negative impact on Emerging Market currencies, equity markets, and commodities. In late 2015, he forecast that gold and gold stocks would rally significantly in 2016.
Macro Tides February 5, 2018
Dollar Markets often don’t reward logic. Since January 3, 2017 the Dollar Index has declined by 13% even though the Federal Reserve has increased the federal funds rate by 75 basis points and is expected to raise it by another .25% at its March meeting. A big rally in the Dollar could certainly upset the apple cart and lead to an unexpected correction in global equity markets. Sentiment is quite negative the Dollar especially after Mnuchin’s comments. Technically, the Dollar still needs more time and will probably make a lower low in coming weeks as the Euro is making its high. Prior to the Dollar’s rally in September and October 2017, the Dollar made an initial low in August, bounced, and then recorded a lower low in early September. I expect something similar will unfold in coming weeks which would provide technical evidence that the down trend was nearing an end. As discussed in January, the repatriation of overseas profits could provide the Dollar a lift starting in the second quarter and beyond.
Macro Tides March 4, 2018
Dollar If the Euro declines in coming months the Dollar Index will rally since the Euro comprises 57.6% of the Dollar. The recent low was 88.25 (cash) and could be retested amid trade discussions that include retaliatory actions by other countries in response to U.S. steel and aluminum tariffs. Once the top in the Euro is confirmed, the Dollar chart suggests a rally to near 95.00 is possible in coming months. This would represent an increase of almost 8.0% from its low at 88.25. A Dollar rally of this magnitude could prove a headwind for U.S. stocks, some commodities, and Emerging Markets, especially if Treasury rates breakout before Labor Day and are joined by higher rates in Europe.
The combination of fundamentals, my proprietary Major Trend Indicator a number of technical indicators, investor sentiment as measured by the daily Call / Put Ratio, Option Premium Ratio, weekly Investors Intelligence survey, and contrary opinion have proven helpful in discerning the intermediate trend in the stock market.
In addition to the trend in the U.S. Dollar, the factors that most contribute to an emerging markets currency’s direction are domestic GDP growth, current account surplus or deficit, fiscal budget surplus or deficit, and the rate of inflation. In general, a country with good GDP growth, a current account and budget surplus, and low inflation is more likely to have a stable or rising currency.
It is of value to be able to discern when the Dollar is likely to rally or fall, as it will influence how emerging market bonds and equities perform.
This was especially true from September 2014 to the end of 2016 as the Dollar rallied by more than 25%. As the Dollar corrected in 2017, Emerging Market
bonds and stocks performed well, but terribly as the Dollar rose in 2018 after recording a low in February. My analysis of the trend in the Dollar has been helpful
in identifying when an opportunity in Emerging Markets was developing or when Emerging Markets were not attractive.
In March 2017, I recommended buying Treasury bonds when the yield on the 10-year Treasury bond was above 2.60% in anticipation of a decline in the 10-year yield below 2.20%.
On June 1, 2017 I published an analysis of the long term trend in Treasury yields since 1946 entitled “Is a Secular Bear Market in Bonds Possible?” My conclusion was that the
secular bull market in Treasury bonds that began in September 1981 had ended in July 2016.
Fundamental analysis is not very helpful when analyzing Gold. Contrary to conventional wisdom Gold does not rally based on changes in inflation or changes in interest rates.
Monitoring the positioning in Gold futures and Sentiment has been far more effective in indentifying tops and bottoms in Gold.