Forex & commodities on January 29 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. U.S. dollar: don’t be a contrarian just for the sake of being a contrarian.
  2. Capital repatriation will cause corporate bond rates to rise in 2018.
  3. Inflation will rise in 2018 and 2019. This is bullish for oil, gold/silver, and other commodities.
  4. The U.S. dollar’s bear market is bullish for oil in the medium-long term.

3 pm: don’t be a contrarian just for the sake of being a contrarian
The majority of investors/traders think that the U.S. dollar is in a bear market right now. I agree. Some contrarians are bullish on the U.S. dollar simply because too many investors/traders are bearish. Being contrarian just for the sake of being contrarian is silly. Here’s a point that many contrarian traders don’t realize:

The masses are RIGHT during the middle leg of a bull or bear market. The masses aren’t always wrong!

For example, the masses were extremely bullish on the stock market in 1995, 2013, and 2017. They were right. The stock market soared and continued to soar over the next year.
The majority of traders were bearish on the U.S. dollar from 2002-2004. They were right. The U.S. dollar tanked.
“Smart money” commercial hedgers in the COT report are often contrarian simply for the sake of being contrarian. They were forced to cover their massive USD long positions from 2002-2004 while the USD went down.

I believe that the USD is in a bear market based on international Money Flow. I will not turn bullish simply because “too many traders are bearish on the USD”. Sentiment can be extremely pessimistic for a long time before the market bottoms.
3 pm: Capital repatriation will cause corporate bond rates to rise in 2018.
Treasury rates are going higher as inflation rises and the Fed hikes rates. Corporate bond rates have been falling, but this will change in 2018 and 2019.

Investors assume that when U.S. companies repatriate their capital from overseas, they are repatriating cash. This is not the case. The majority of their overseas capital is parked in corporate bonds. For example, Apple wants to repatriate the vast majority of its overseas capital and use it for capital spending, dividends, share buybacks, etc. Of Apple’s $252 billion in overseas capital, $153 billion is parked in corporate bonds!
Hence, U.S. companies that repatriate their foreign capital will need to sell bonds (mainly corporate bonds) in order to finance dividends and share buybacks. Their selling will reverse the downtrend in corporate bond rates and cause interest rates to rise in 2018 and 2019.
4 am: Inflation will rise in 2018 and 2019. Bullish for commodities.
An output gap is when the economy operates at a level that exceeds its potential output. “Potential output” is the maximum amount of goods and services that an economy can produce when it’s at full capacity and most efficient.
Inflation rises when the output gap turns positive because businesses are operating beyond full capacity. E.g. they have to pay workers overtime wages.
The output gap for developed economies turned positive in 2017. This means that inflation will rise in 2018 and 2019.

Commodity prices rise when inflation is rising. Gold and silver outperform other commodities during inflationary periods.
4 am: the USD’s bear market is bullish for oil.
There is an insanely strong inverse correlation between oil and the U.S. dollar index right now.

The U.S. dollar is in a bear market. I expect this bear market to last for 2 more years. This inverse correlation is a medium-long term bullish factor for oil.

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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