Forex & commodities on December 18, 2017: thoughts & outlook


Here are my discretionary thoughts on forex and commodities (oil, gold, silver, etc). I only trade the S&P 500.
Go to the homepage for my latest thoughts on forex and commodities.

Thoughts

  1. U.S. oil rig count will explode in 2018.
  2. If oil falls in the first half of 2018, then USDCAD will rise.
  3. Donald Trump’s upcoming trade war: a very bullish case for the USD in 2018.
  4. Gold/silver will crash if the USD rises on Donald Trump’s trade war.

4 pm: U.S. oil rig count will explode in 2018
Steve Kopits from Princeton Energy Advisors has one of the best understandings of the U.S. energy industry. Here are his thoughts on U.S. rigs.

  1. U.S. rigs are increasing overall.
  2. Expect the U.S. rig count to soar next month, with some weeks exceeding +10 horizontal oil rigs.


These thoughts confirm what I’ve heard from analysts at conference calls: U.S. production-per-rig will increase significantly in 2017. This is a medium term bearish factor for oil.
*I don’t expect oil to fall significantly below $50. $50 is the average break-even price for U.S. shale. They will not increase production to the point of crushing oil prices.
4 pm: Correlation between oil and USDCAD
There is an intraday inverse correlation between oil and USDCAD right now. If oil makes a correction in early 2018 due to increased U.S. supply, then the USDCAD will rise.
USDCAD only accounts for 9.1% of the USD Index (EURUSD accounts for 57.6%). However, USDCAD is frequently used by traders as a leading market for the USD Index. Hence, a rising USDCAD is a medium term bullish factor for the USD.
2 am: Donald Trump’s upcoming trade war, and what it means for the USD
I outlined the very real possibility that Trump will start trade wars with China, Mexico, and Canada in 2018.

Trump has been strangely quiet after May 2017 about trade wars, NAFTA, and China. Trump is smart. He played Good Trump in 2017, and plans to play Bad Trump in 2018.
Good Trump policies (i.e. tax cut) needed Congressional approval. That’s why he did his Good Trump policies in 2017, while Republicans still control both chambers of Congress.
Bad Trump policies (i.e. trade war) DON’T need Congressional approval. That’s why he chose to wait until 2018, when Republicans are too preoccupied with midterm elections to support Trump’s trade wars. He doesn’t need the Republican party for Bad Trump policies.

I think this trade war will be a medium term bullish factor for the U.S. Dollar in 2018.
When Trump became elected, the USD soared because of potential trade wars with China, Mexico, and Germany. Then the USD slowly fell as Trump didn’t follow up on his threats.

But today, it looks increasingly likely that Trump will start trade wars after Q1 2018. Click here to read why.
Everyone knows that the U.S. will ultimately win a trade war. The U.S. has more bargaining power than anyone. The goal of a trade war is to boost American exports. More exports, fewer imports = higher USD.
I think the USD Index will approach 100 again if Trump starts trade wars or renegotiates trade deals with China, Mexico, or Canada.
2 am: Gold and silver will crash on a trade war.
There is a clear inverse correlation between gold/silver and the USD right now.
Here’s the gold-USD correlation.

Here’s the silver-USD correlation.

On a longer time frame, you can clearly see that gold/silver are very weak. The USD has been going down for most of 2017.

You’d expect gold/silver to soar in 2017 based on this inverse gold/silver-USD correlation. This did not happen. Gold has barely gone up in 2017.

Silver has fallen in 2017!

This price action is very bearish. If gold/silver can’t go up when the USD falls significantly, gold/silver will tank if the USD rises to e.g. 100.

Leave a Comment