I have been following the 233 and 89 weekly moving averages in the dollar index for several months now. Thus far, these two have been useful indicators. Last Friday the index fell through support around the 78.60 level with some follow through to the downside today. While it has held the 89 week MA, the situation for the dollar looks bleak. If the 89 week MA is lost and the dollar soon finds itself with a 77 handle, that would suggest even further weakness. On an intraday basis, the dollar made a run at this level today and failed:
The Canadian dollar looks like it may be breaking out after building a base in the past several months:
Come to think of it, the Canadians are one of the few developed nations in the western world not currently engaging in quantitative easing. Between the US dollar, the Euro, the Yen and the Loonie, the Canadian buck seems to have the best looking house. As the brilliant David Rosenberg noted in a recent Bloomberg radio interview, he was asked what the US could learn from Canada. He said: (I modified this a bit for clarity, it is not a direct transcript)
"The Canadian story is more than just reserves in the ground and more than just political stability. Its also a very sound banking system. Part of it is that Canada never had the 'Wild West.' Canada had a lot of oversight and regulation in its big banks -- they never got up to 35:1 leverage ratios. There was never a sub-prime mortgage market that was built up in Canada. What happened in Canada that is relevant is that in the Early 1990's, Canada hit the debt wall, just like countries in Europe are hitting the debt wall and we had to go through radical fiscal austerity. What happened at the time is that the Liberal government at the time, which was responsible for the mess, was the party that got out of the mess. You see Canada has a parliamentary system and when you have a majority in a parliamentary system, you can get away with whatever you want. Its like a dictatorship. Here in the US lets say the president gets re-elected and the House and Senate go Republican -- sometimes checks and balances work. But when you need strong leadership, and no room for comprise and decisive action taken, what happened in Canada was that under Jean Chretin and Paul Martin, they had a majority government and they saw Canada had hit the debt wall and could not afford the social infrastructure that had built up for decades and they dismantled it! Taxes were raised and retirement ages lifted -- all the tough decisions that have to be made. Modeling this in the US would take strong political leadership.
Elsewhere, The Bank of Japan and the ECB have expanded their balance sheets significantly in the past several months. Meanwhile in the US, the Fed has undertaken Operation Twist and has committed to ultra-low interest rates until 2014.
I suppose Greece has been 'saved' for now but how much longer can this game last? The core problem hasn't been solved and I don't think the current can kick with Greece can last for very long. Therefore I wonder how the EURUSD exchange rate will behave when problems arise again.
As an aside, Jim Rickards has been mocking Zerohedge lately on twitter about the strength in the EURUSD exchange rate. Zerohedge definitely has a bearish bias on the EURUSD and a general bearishness on the markets as a whole. I think ZH should always be taken with a grain of salt, but I don't know of a more active, thought-provoking and funny twitter feed/blog when it comes to following asset markets. Sure, 'Tyler' is wrong all the time. I don't mind -- I never make trades based on his prognostications! But he follows the market, the economy, and the news cycle like a hawk -- while having contributors like Chris Martenson and Christopher Whalen post pieces on his blog. He makes jokes too! How many people in the financial industry can create humor about the current situation? Marc Faber? Jim Rogers? It is rare. Rickards has been hating on ZH forever and honestly I want to know why. I asked him on twitter today and he didn't respond. I find it notable that Tyler doesn't follow Rickards, but Rickards follows him and calls him out regularly.
Back to the discussion regarding the US dollar. It should be noted that the USDX is an antiquated index, despite the fact that it may be a useful market timing tool. The Trade Weighted Dollar Index, which is a broader measure of global currencies against the US dollar, is a better measure of exchange rate value of the dollar. While I cannot analyze it's chart much technically, it does not inspire confidence:
Notably, this broader index doesn't include gold and silver. Commentators and money managers often mention an assets performance YTD. It is sometimes difficult not to think in such short-term time frames. Irrespective of that, the true dollar index -- the gold price -- was firm today and is up 14.15% YTD:
Silver led all markets today with a stellar performance. It is up near its highest levels of yesterday overnight and is up around 34% YTD:
Finally, the gold stocks had a strong day and may be finally ready for outperformance. I have been using the following ratio chart, courtesy of Break Point Trades, as a tool to monitor this sector:
A strong but not astronomical performance in gold in the near term could translate into a breakout in gold stocks. I think there is value in names such as NEM, GG, ABX, SLW, RGLD, FNV and the solid GDXJ-esque companies.
In sum, James Rickards has been correct since the beginning of the year. His bullish EURUSD call, and his bullishness on gold have proven spot on. He tweeted recently about the Fed weak dollar policy winning out over other central bank easing in the current currency war. That is also playing out, as evidence by the dollar weakness against most major currencies recently, aside from the Japanese yen. Can the rally in the EURUSD, AAPL, precious metals and oil continue? Time will tell and I'll be watching!! =)
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