Forex & commodities on January 16, 2018: outlook

Here are my discretionary thoughts on forex and commodities. I only trade the S&P 500.
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  1. A “significant correction” in U.S. stocks would be bearish for the USD.
  2. A financial war between the U.S. and China.
  3. The USD Index is trying to find support on 90.
  4. A crash in cryptocurrencies will be good for gold and silver.

4 pm. A “significant correction” in U.S. stocks would be bearish for the USD.
Global central banks will transition from quantitative easing to quantitative tightening (buying bonds to selling bonds). Investors & traders are concerned that this will end the bull market in stocks.

For starters, our Medium-Long Term Model does not foresee a “significant correction” in 2018. It has only failed to predict 3 significant corrections since 1950.
Let’s assume that we’re wrong. Let’s assume that the S&P does make a significant correction in 2018. If that happens, global central banks will reverse from tightening to easing (keep in mind that incoming Fed Chairman Powell is a dove). When that happens, inflation will rise even faster, the USD will sink even faster and stocks will soar for 1-2 more years.
9 am: A financial war between the U.S. and China
China wants to slowly diminish the USD’s power in financial markets and supplant it with the PetroYuan, which will be backed up by gold. To accomplish that, China needs the Yuan to appreciate and the USD to depreciate. China will ultimately win this currency war:

  1. China has more than $3 trillion in forex reserves. If they set their hearts to accomplishing this goal, they have the money to do so. The U.S. has $20 trillion in debt.
  2. More importantly, Trump does not want a strong USD! He would rather see the USD weaken, which would boost American net exports.

USDCNY is in a bear market. It is on the verge of breaking down.

Other countries believe that China will win this currency war as well. Germany and France announced yesterday that they will add Yuan to their foreign currency reserves. This is a symbolic gesture more than anything else (Germany & France aren’t converting a massive portion of its forex reserves to Yuan). It means that they believe in the Yuan’s bull market.
8 am: the USD Index is trying to find support on 90.
The USD Index’s real support was 91 (previous low). It broke below that support 2 days ago. Now it is trying to find support on 90, which is a psychological support (round #) instead of a real support. I expect the bounce on this level to be weaker. The USD might bounce to 91, turn prior support into resistance, and then go down.

The medium-long term direction for the USD is clear. It’s a bear market.
8 am: A crash in cryptocurrencies will be good for gold and silver (particularly gold).
Bitcoin’s massive bubble since 2015 has depressed gold and silver prices (especially gold, which as a safety haven factor). A lot of doom-and-gloom hoarders who used to buy gold switched into buying Bitcoin. How do I know? Simple.
If you read the comments on Zerohedge (a doom-and-gloom website):

  1. 3 years ago, everyone was saying “buy gold, buy gold, stack gold, avoid fiat currencies” etc.
  2. Today, everyone’s saying “buy Bitcoin, buy crypto, avoid fiat currencies” etc.

Zerohedge is a good sentiment indicator for the doom-and-gloom crowd.
Here’s gold.

Here’s Bitcoin on a log scale.

I don’t know if the bubble in cryptocurrencies is over. But when it does end, all those doom-and-gloom investors who buy and hold Bitcoin will transition into buying gold. That is a long term bullish factor for gold.
Crypto prices are falling today. Many of the major cryptocurrencies are on the verge of breaking down. If they breakdown, then you can expect a massive move lower.

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.

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