Forex & commodities on January 11, 2018: outlook


Here are my discretionary thoughts on forex and commodities. I only trade the S&P 500.
Go to the homepage for my latest thoughts on forex and commodities.

Thoughts

  1. An oil correction will bring gold and silver down
  2. USDJPY and interest rates have become disassociated. This means that the USD can go down and rates can go up in the long term.
  3. How NAFTA renegotiation will impact the U.S. dollar index.

2 pm: An oil correction will bring gold and silver down
Oil is insanely overbought on a weekly RSI basis. When momentum is this high, the market typically makes a bearish divergence before beginning a correction.

There is a positive correlation between the U.S. stock market and oil right now. As a result, the stock market and oil will probably make a correction together in February-March.
Oil’s rally has also lifted other commodities higher. If oil and the S&P fall in February, then gold and silver will fall as well.


7 am: Correlation between USDJPY and rates have broken down.
There was a very strong correlation between USDJPY and the 10 year Treasury yield throughout most of 2016 and 2017. This correlation is now breaking down.


This is to be expected. The U.S. dollar index needs to permanently get rid of the “rising interest rates = rising USD” argument.  History shows that interest rates rise when inflation rises. Inflation is BEARISH for the U.S. dollar.
The U.S. dollar is in a bear market, and rates are in a long term bull market. The correlation between these 2 markets MUST break down, and it has already. The correlation has changed from positive to inverse.
7 am: How NAFTA will impact the U.S. dollar.
Bloomberg wrote a good piece on A look at the most likely scenarios for NAFTA. It’s very similar to my post How NAFTA renegotiation will play out and impact the USD. Bloomberg highlights 3 possibilities.

  1. Zombie deal: Trump tries to pull the U.S. out of NAFTA (i.e. starts a trade war), but Congress blocks him.
  2. The end: Trump tries to pull the U.S. out of NAFTA and Congress doesn’t block him.
  3. The start: The U.S., Canada, and Mexico successfully renegotiate NAFTA.

As I already explained, scenario 1 is the most likely case.

  1. Scenario 3 is unlikely. The U.S.’ gain is Canada and Mexico’s loss. Canada and Mexico (especially Mexico) will not agree to the U.S.’ key demands. More manufacturing in the U.S. = less manufacturing in Mexico and Canada.
  2. Scenario 1 is more likely than Scenario 2. Congress as a whole supports free trade. NAFTA = free trade. The Republican party supports free trade, lower taxes, and less regulation (think Ronald Reagan). The Democrats will block whatever Trump tries to do.

As long as NAFTA does not get ripped up, the U.S. dollar index will not soar to e.g. 98-100. However, Trump will continue to make threats about withdrawing the U.S. from NAFTA. Will his noise cause the U.S. dollar to make a small bounce to e.g. 94? Who knows. That’s a 50-50 guess.
But the bottom line is simple. The NAFTA renegotiation cannot stop the U.S. dollar’s bear market.

Bottom line

I only trade stocks. These are just my thoughts/outlook on other markets.

  1. Gold and silver will break above their tight range in the first half of 2018.
  2. The USD Index will crater below its final support (90-91) in the first half of 2018.
  3. The best traders I know are still bullish on Bitcoin in the short and long term. I don’t know when the crypto bubble will end.

Leave a Comment