“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Wednesday, May 25, 2011

US Dollar running into some selling


The US Dollar has been able to keep its footing above the 50 day moving average on its daily price chart which is technically bullish but it does seem to be running into plenty of willing sellers between 76.50 - 76.00.

While the Daily chart is much improved its weekly chart still shows it in a definite downtrend.


If the Dollar is going to extend its rally from current levels, it is going to need to take out 76.50 for starters and hold that level going into the close of the trading week.



While gold has been pretty much ignoring what the Dollar has been doing of late, the Dollar still is exerting an influence on the overall commodity sector. Its recent weakness of the past three trading sessions, which I believe is tied to dovish talk coming out of the Fed, has enabled the fund money flows to come back into the commodity sector in general. This has pushed the CCI back above the 640 level, a level which I believe is indicative of the appetite of the hedge fund community for risk. Above 640, they love risk; below 640, they hate risk. Wax on; Wax off.



If the Dollar does rally through 76.50, it is doubtful that the CCI will be able to hold above the 640 level. If the Dollar falls further down towards the 50 day moving average near 75.25, the CCI will continue to push higher.

Since silver is perhaps the strongest recipient of the risk trade, the weaker the Dollar, the more likely we will see silver back up near $40.

What is happening right now is that the same weakness in economic data releases from the US showing an economy that is in danger of stalling, data which had initially worked to throw the risk trades off the table, now seems to be working in the opposite with traders/investors viewing the dovish comments from certain Fed officials as a sign that the Fed is not going to change an accomodative monetary policy. In other words, interest rates will stay at extremely low levels for at least another 12 months. Some are thinking a step further will be some form of stimulus coming from the Fed as well.


If this thinking is for real and begins to take hold, the Fed will be extremely hesitant to cross the market since the reaction would be a huge sell off in equities and a smashing of the commodity markets by hedge funds running out of risk trades. That would instill fears of deflation once again, somethign which the Bernanke-led Fed will not permit.

For now, the commodity complex is signaling that the market has baked into the cake the end of QE2 but not the end of low interest rates with some expecting further stimulus. The more the expectation of additional Fed stimulus grows, the weaker the Dollar will become and the stronger gold will be.

We will have to watch the Dollar's price action to get some sort of clue to what the consensus of the investor community is in this regards.

9 comments:

  1. Excellent post Dan. That hit the spot.

    ReplyDelete
  2. love it, love it, love it

    I just took off all my clothes to rejoice

    It's like a good aloe moisturizer:

    good and good for you

    thanks

    ReplyDelete
  3. Thanks Dan for your continued efforts to make sense of all the mayhem.

    ReplyDelete
  4. I think we should all get a bus and go to the silver inventory which boasted a huge boost yesterday and demand to see it, feel it, lift it [in case it's silver plated plastic]!

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  5. Dan,
    What if the market decided "No more propaganda...we don't buy it anymore" which would be a huge change!
    I am saying that because the last time Goldman Sachs (After talking to their friends at the Fed?) made a (negative) comment about commodities everything was for sale and sharply down. Yesterday despite GS making the opposite call (less than a month after advising selling commodities)AND Bullard's comments thereis NO real market reaction. You are talking about the 640 level for the CCI, in my opinion in order to really say commodities are on the way up again is when we break and stay above the 660 level. If I am right -and so far I am not , commodities should be flat/down and Gold (and silver) should be up as an hedge against the 2 main fiat currencies -Euro and USD.
    What is wrong with my picture?

    ReplyDelete
  6. Ah Daniel-san, better you learn defense before you learn fight.

    Not exactly sure how that comment is relevant but sounded cool at the time! LOL

    ReplyDelete
  7. Nice work, Dan. The DXY graph is the key to all of this. Fiats go to their intrinsic value, which is zero. Go metals...

    ReplyDelete

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