DXY June Week 3

16 июн. 2019 г.

The Dollar Index had a technical bounce seen late in last weeks trading sessions that it was working off of. A bounce of both a 12-month ascending trendline/channel and a 200-day moving day average which is known to be a very effective technical indicator for an index such as the DXY. This firm hold of both technical aspects saw a 100 basis point increase to the upside --well through my weekly upside target of 97.14-- to close the week at 97.45.

The causation of the rally yesterday was plain and simple; GDP. A lot of the key issues with currencies such as the GBP, CHF, EUR, etc, are all relying on the Dollar as an entity to blame and the use as a form of venting mechanism. The anticipation for the 'Trade War' between the United States and China is distracting to market players, to say the least. It was a subliminal mentality by both equity and the foreign exchange market's alike, which resulted in a stronger Dollar seen yesterday.

Why did the dollar go up?

- The U.S. Consumer Confidence report (UofM) was a disappointment, to say the least. At a reading of 100 for the previous month, this most recent outcome was 97.9. Expectations moving forward dropped from 93.5 to 88.6, which is a very significant change.

- The long-term inflation forecast hit a record low, which builds into the amount of weight--and also the high-degree of speculation-- that the monetary policy decision will have next Wednesday by the FOMC (Federal Open Market Committee).

-Industrial production numbers saw a noteworthy improvement in an increase of 0.4%.

- Retail Sales from May were in line with expectations (in my opinion, were clearly priced into the market already). With the growth of 0.5% in sales excluding autos, was much better than expected. It was the previous months reading which was the big mover. The little things such as a confirmation in a slowing of sales or a disappointing Consumer Confidence Report, what we fundamental analysts are concerned with going forward in the biggest expansionary economy to date.

The April figure, a 0.2% contraction for the headline retail sales report actually came out with an improvement to 0.3%. Although this may not seem mathematically significant, the fact we can't forget is what the retail sales figures mean; and should mean. We're talking THE figure that represents the spending habits of the largest economy in the world.

That is a huge improvement in perspective, however, was it indicative of the relief rally seen by the Dollar last Friday? That's up to you to ascertain.

The 'Trade Wars', economic expectations, political/environmental risks, and next weeks input of monetary policy by the FOMC, are all factors which us as retail traders need to be aware of before entering a trade. I would say based on my experience that the uncertainty of next week regarding how the market is already in anticipation of the Fed Funds Target Rate on Wednesday should result in your best bet of rising your own capital to be done by standing on the sidelines. Don't risk exposure until the outcome is known.

China

Friday also had economic data from China that would be the backtrack to how and why we saw a stronger Dollar. Improvement in retail sales and unemployment (steady at 5.3%) were not to be taken lightly. Fixed assets, property investment, and industrial production for the month of May took a hit. The lowest figure of growth which was 5% may seem big, but not enough to keep this country in alignment with the 6.5% goal that the Chinese government is set on.
However, it was enough for the Peoples Bank of China to trigger a new plan to inject ¥300 billion into smaller regional banks within the country. This was to be seen as a problem, which was then priced indirectly to the Aussie (AUD) as multi-year lows were achieved at price. This is simply a disparity between GDP and the uneven health of the global economy.

Now the question to you is this. Are you more worried about the shorter term winners and losers, or could you perceive a bigger risk to us as a global economy?

Can the S&P restore record highs, and continue to run the enormous deviation in terms of the cost of speculation within in the markets -- the effect of-- and the anticipated risk to reward?

These are on opposite paths and as of now skewed inversely.

Trade War

Broadcom (ticker: AVGO), which is one of the most significant tech companies with Chinese exposure, announced that it's annual outlook dropped by $2 billion yesterday. This was caused by clear fear of the global environmental risks, and in their words, "..effects of exports restrictions of (Huawei)". We've seen resiliency through lesser exposed and more influential equity players such as Apple, but this was a concentrated impact on tech-specific (chip makers; semiconductors). These also have back listed channels which include agricultural equipment. This isn't even to mention the fact that this entire industry is hanging on a thread by the unforeseen outcome of the U.S./ China Trade War.

On Thursday around 600+ companies that all called on the White House to end and come to a resolution because of a few reasons. The most obvious one was to change Trumps course. He has shifted to rhetoric (in just a short 6 days) that Xi Jinping doesn't need to show up to the G20 for a resolution to be met. This is another clear example of how small words by one person can lead speculation on a diluted path of perception.

Where else to focus next week?

The focus next week if the monetary policy on Wednesday's FOMC rate decision. This isn't just a rate decision, but also includes an update for the summit of economic projections which includes the expectations for growth, employment, and interest rates.

There is an enormous expectation from the market that the Fed will cut interest rate by 61 basis points by September. The acceleration of interest rate expectations saw an inverse reaction to the Dollar seen last week. This was a major reason why I was-- and am still-- bearish on the Dollar.

Steve Lighthizer to testify on trade before a panel of Senators will be what I personally am interested in this next week on Tuesday outside of headlines.

Regardless of your stance on President Trump, his tweets have rhetorical implications on policy decisions from the executive branch. Hate him or love him, it's important to stay in sync with such rhetorical statements, as they move the entire global marketplace.

The probability of a rate cut is 23.3%, which is fairly aggressive. The markets are expecting a rate cut. If we see a clear dovish path towards a suggestion of 2 rate cuts by the end of the year, then I suspect we will see a lift in U.S. equities and a decrease in the DXY.

This would most significantly turn AUD/USD from its lows, and also USD/CAD and USD/CHF.

If the Fed (is as it's likely to do) insinuates 1 rate cut throughout this year, the market at best will be disappointed. That makes trading as either an equity or an FX trader particularly tuff, as a high degree of volatility will come as a result of this happening on Wednesday.
(No rate cut, and a suggestion of 1 rate cut throughout the year)

The S&P 500, DXY, 2-Yr. Treasury yields and Gold will need to be watched closely. Capital outflows because of the perceived devaluation of not only the U.S. Dollar, but also the Swissy, Yen, Pound, and Euro; will give a nice push to Gold prices which are currently at a significant descending trend line of resistance at 1360.

Last Friday's serious upside wick hasn't been seen technically speaking since 2017. If the Fed holds its ground next week as explained in the paragraph above, expect a clear break through and above 1360 for Gold (XAUUSD).

I hope I've prepared you fundamentally (más o menos) for a unpredictable week ahead.