The US dollar index is down about 12% from the highs of late last year. It has broken support, no matter where you draw the trendline.
What’s Next?
No one can say for sure “what’s next”, certainly not me. But I can say that European investors need significant annual gains in US equities just to match the declining value of the US dollar.
Last week, Pater Tenebrarum at the Acting Man blog pinged me with this comment: “People underestimate how sticky currency trends are.”
Given the significance of what this trend change means for the monetary cycle and the current bubble in U.S. ‘paper’ assets, it’s eerie to watch this rollover in the dollar unfold in utter silence.
Mike “Mish” Shedlock
If the S&P breaks down, investors will buy US bonds, probably causing a reversal of trend….If the dollar continues to decline, however, foreign investors may get out of the real estate market more strongly than stocks, since real estate is costly to maintain, unlike stocks.
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The declining dollar would not, at least at first, be a reason for an overseas investor to flee dollar assets, but a loss of confidence in the US economy would. Right now, the best thing to be said about the US economy is that it is one of the more dynamic systems in the world … people abroad may love or hate Americans, but they admire their get up and go attitude (to wit the self help witnessed in the wake of the last to Hurricanes).
What worries foreign investors are things like increased government speding coupled with an uncapped debt accumulation, which is quickly becoming an unconstrained call on the entire productive economy faster than the economy itself is growing. Some of this would appear at first glance to be mitigated by reduced regulation, but that itself is now being offset by, for want of a better term, economic imperialism — things like threatening to cut China out of SWIFT, which would be the biggest blunder that could be made, because it would cripple a US economy, the supply chain of which is increasingly dependent on China, and punish the US consumer, who has become increasingly dependent on cheap goods, much of which comes from Asia.
On this last point, not only is the US economy being put in jeopardy, but the making of such threats puts the dollar directly in peril because the Chinese use the dollar for a lot of world commerce, like oil and commodity trade, which gives an underlying support to the dollar, they now see de-dollarization as a vital step to their own national well being.
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One way to strengthen the dollar would be to allow US citizens to actually use it beyond mere physical dollars, coins and bills. That’s right: US citizens should be allowed to have accounts at the Federal Reserve too and all other privileges for the banks abolished.
That’s an ethical way to strengthen the dollar – unlike making it needlessly expensive as some unprincipled people would do.
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Watch your wealth disappear in US stocks or vanish in EU bank bailins – tough choice.
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Whatever you do, don’t buy BTC because the Exchange Stabilization Fund can’t assure it will never correct more than 2 to 3% every so often.
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Is that Nancy & The Donald holding the net?
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Yes, while Boehner stands by weeping and Ryan is checking his charts.
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“… it’s eerie to watch this rollover in the dollar unfold in utter silence.”
Shh. They don’t want us to know.
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More likely they are thinking, “This is the USD, the indispensible currency. This can’t go much farther.”
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Such explosive moves are caused by hedge funds, not politics or “real” business uses.
Most likely it is a yen/dollar carry trade being unwound. Borrow yen at zero percent and buy US bonds with heavy leverage. Profit handsomely when the dollar is rising, but everyone will hit the exits when it starts falling.
Yen carry has funded much of the malinvestment the past couple of decades.
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Everything has been so distorted for so long now, be funny if a weak dollar is the pin that pops multiple bubbles.
Might need another war to buck up the buck, NoKo is ahead of Iran and Ukraine, a short round from NoKo into Japan should do it.
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– A rising EUR/USD will also NOT be welcome for US companies who have taken out a BIG bet: i.e. the EUR/USD would continue to weaken. That ( in combination with european yields – on average – being lower) would make borrowing in EUR a socalled “No Brainer”. But, instead of weakening, the EUR went higher against the USD this year and could/will cause some MAJOR headaches for US companies.
– Borrowing in EUR by US companies means that they’re effectively “short the EUR”. When those currency bets are going to be unwound they we could see the EUR/USD go as high as perhaps 1.30 or even 1.40. Not a pleasant outlook for those US companies.
https://wolfstreet.com/2017/05/21/reverse-yankee-bonds-winners-u-s-companies-losers/
– I have seen this game being played before. I know a company that had a significant amount of its revenues in USD but they borrowed in CHF because then the borrowing costs/interest costs were much lower. What they didn’t anticipate was that the CHF/USD started to go higher. Ouch & OMG.
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An enormous mistake in conventional wisdom.
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Maybe they realize that the manipulated inflation figures are complete fantasy, bonds artificially suppressed and payback time is here
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What,s next? October!
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It’s also possible that the S&P will continue to rise, though not as fast as overseas markets. What’s interesting is that US credit has turned over without any great fanfare, as in a stockmarket crash, or some other money market panic.
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A falling dollar will finally bring about the inflation the Fed wants. It should also help oil prices. It will also lead to declining standards of living as well.
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“It will also lead to declining standards of living as well.”
It would be following an already declining standard of living.
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plot 5 year gold against same period dollar and euro
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This suggests to me that rates can and will go up despite a drop in the $;$ the justification is not inflation, but to save the markets and raise the $$.
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A fiat dollar is a claim on the productive capacity of 40 million dindus and 40 million Mexican peasants.
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A falling dollar should help bail out Chinese credit excess as capital flight reduces. And of course all those that borrowed dollars should be pleased.
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What about EU exporters to US?
EM borrowers may be OK for now but what about Germany, therefore EU?
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The opportunity to pay for NATO has arrived.
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Former chief economist of the Bank for International Settlements, William White, told Bloomberg TV recently that “the system is dangerously unanchored.” White voiced his concerns such as prices being very high, in particular for high-yield assets and equities, VIX at very low levels, and house prices are rising strongly.
What stood out in my mind was his indication that central banks cannot or will not be able to solve what might be seen as a growing “liquidity problem.” White pointed out that Europe’s creditors are likely to face some of the biggest haircuts. This is a bit ironic coming at a time the euro is surging ever higher. more on this subject in the article below’
http://brucewilds.blogspot.com/2017/09/former-bis-chief-system-dangerously.html
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Next stop :
1) July 2013(H), or :
2) the 2011(L) to Apr 2014(L) support line. Mish, please extend the chart.
3) Catalonia referendum might affect the trend to form a zigzag down.
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Reblogged this on World4Justice : NOW! Lobby Forum..
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Mish,
From a purely technical standpoint, you said “no matter how you draw the trend line. Trend line points are often in the eye of the beholder, but it’s also legitimate technically to use the last two significant swing lows (Tom DeMark) as opposed to the last two significant low closes. It doesn’t look like there’s any way I can attach a file here, so maybe I’ll email you my DX chart. I used to trade DX quite a bit, and note that, contrary to your comment, the current low is still above the DeMark trendline. Moreover, price has hit a significant Fibonacci project level and a price vs. momentum positive divergence is in place. Were I still trading DX I would still be watching at this point, but getting interested in a long after a failed retest.
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