Saturday, July 30, 2016

Watching* The Dollar, Key to Commodities This Month

A stronger dollar lowers nominal prices of those commodities priced in dollars and is in fact a big part of our current positioning. So this piece by Brown Brothers Harriman & Co's Head of Global Markets Strategy is a bit troubling, at least in the short run. Longer term you should be able to buy a euro at the 99¢ store but as has been said, the long term is just a series of short terms.

From Marc to Market:

The US dollar advance was stopped in its tracks by the disappointingly weak Q2 GDP figures.  The 1.2% annualized growth rate was roughly half of the pace expected.  The FOMC statement earlier in the week did not leave the impression that a September hike was likely, and with the poor growth numbers, the odds were downgraded further.

Now given the reduced contingent risk of a September hike, the odds of a hike 50-75 bp end of the year target range for Fed funds has fallen to about a 1 in 3 chance.  However, if you think that there is no chance of a September hike (doubts about the economic strength) or a November hike (too close to the election), then the odds of a December hike is still close to 60%.

The Dollar Index had rallied from 93.00, the low from the day of the UK referendum to a high near 97.60 that it had tried several times over the past week or so to overcome.  The sell-off on the disappointing GDP news sent to near 95.30, which is a 50% retracement of the move and the lows after the June jobs data in early July.  The next immediate target is 94.75, which corresponds to the 61.8% retracement and also the 50% retracement of the larger move that began in early-May from near 92.00.    Below there is 94.00, which is the 61.8% retracement of the bigger move and is near where a trendline drawn off the May and June lows intersects end the end of next week.

The technical condition has deteriorated.  The five-day moving average will move below the 20-day average early next week for the first time in a month.  The MACDs have turned down.  A note of caution comes from the lower Bollinger Band, which the Dollar Index traded through after the GDP report, but managed to close inside it (~95.55).  

The euro had found bids near $1.0950 and with the downside momentum easing, the late shorts were vulnerable, and the short squeeze carried the euro to almost $1.12.  The five-day moving average is set to cross above the 20-day average at the start of August. The MACDs are crossing higher, and the RSI is trending lower.  Like the Dollar Index, the euro is near its upper Bollinger Band (~$1.1160). Unlike the Dollar Index, it closed above the Bollinger Band, which may inject some caution at the start of the new week....MORE
 *As I footnoted in a 2010 post and ref'd in 2011's "Climateer Line of the Day: Voyeur Edition":
...One of my mentors could not stand indecisive traders. He loathed them almost as much as he loathed losses. 
If one said about an instrument "I'm watching it" he'd bellow "You like to watch? What are you, a freaking voyeur?" Except he didn't say "freaking". 
If you were asked about implementing a certain strategy and said "I'm thinking about it"  the response was "What are you, a freaking philosopher?", again substituting a different word. 
Remember that the next time somebody tells you they have something they want you to watch.