Forex & commodities on July 10, 2017: thoughts & outlook


These are our sister fund’s thoughts on the currency and commodities markets. They trade gold/silver using a discretionary approach. We trade the S&P 500 using our quantitative models.
*Go to our homepage for their latest thoughts. We update this webpage throughout the day.

Thoughts

*FYI, this sister fund is run by my cousin. Hence we share a lot of research and thoughts. Like my fund, his fund isn’t open to outside investors (besides a few close family and friends).

  1. Bullish reversal signs in gold and silver.
  2. USD bears are winning the bull/bear fight.
  3. Individual currency pairs: bearish for the USD.
  4. Commercial hedgers are extremely bearish on the Euro.
  5. Will Trump devalue the U.S. dollar like Reagan did in 1985?
  6. The Euro is more bullish than the Yen or CAD.
  7. Will silver retrace 61.8% of its flash crash?

5 pm: We’re starting to see bullish reversal signs in gold and silver.
Silver went from underperforming gold in the morning to outperforming in the afternoon. GDX also outperformed gold. Bullish.

The bearish pattern is changing. Previously, gold/silver was falling or flat from 8-10am. Today, silver spiked at 10am. Gold followed silver’s spike.

Gold/silver still have a positive correlation with EURUSD and a negative correlation with the USD Index. Today, gold/silver became stronger than EURUSD. When EURUSD fell, gold/silver didn’t always fall. When EURUSD was flat, silver spiked. This is a bullish development for gold/silver. Over the past few weeks, gold/silver had been weaker than EURUSD.
5 pm: USD bears are winning the bull/bear fight.
There is a bull/bear fighting going at at 96 (USD Index). This was the beginning of the Trump-rally. Bears are winning. 96 has turned from support to resistance.

If the USD doesn’t go up a lot on Yellen’s testimony this Wednesday, it’s almost guaranteed that bears have won. The USD is in a bear market, and rate hikes can’t push the USD up.
The next support level is much lower: 93-91.

5 pm: Individual currency pairs.
The Euro is at a big resistance. Waiting to breakout.

EURUSD is once again supported on its 200 hourly moving average.

USDCAD is bearish. Moving inversely with oil. (Oil down from 1-6 am while USDCAD up. Oil up from 7-11am while USDCAD down.)

USDJPY is bearish. The BoJ announced a bazooka – infinite QE – and USDJPY went up a mere 1.5.
The BoJ can’t fight the market forever. The BoJ wants to keep the 10 year down? Fine. The 5 year is rising. Japanese market-determined rates are rising.
USDJPY is at a big resistance and its RSI (momentum) is high. Overbought RSI is useless in a bull market, but it signals tops in bear markets/big consolidations. The USD Index is in a bear market.

7 am: Commercial hedgers are extremely bearish on the Euro.
Commercial hedgers are often considered to be the “smart money”. They are extremely bearish on the Euro right now.

Our sister fund doesn’t think that this is an important factor.

  1. The Euro’s history is extremely limited, so any “historical studies” aren’t very valid. There aren’t enough historical cases.
  2. In bull markets, commercial hedgers are often forced to cover their shorts as the market rises. It’s possible that as the Euro continues to rise, hedgers will become MORE bullish because they are forced to cover their shorts.

7 am: Will Trump devalue the USD like Reagan in 1985?
As we mentioned in today’s update on the U.S. stock market, the risk of a Trump trade war is subsiding.

Trump got the message after the G20 met on July 7-8. “If Trump starts slapping tariffs, he stands alone. It is 19 countries against the U.S.”.
China, Germany, and Russia are all allying against Trump on trade. Individually, none of these countries are strong enough to stand up against the U.S. (Trump). But combined, Trump has no choice but to abandon his destructive trade war policies.

Trump’s ultimate goal isn’t to start a trade war. Trump’s goal is the “America first” ideal. He really only wants 2 things – more jobs and more American exports. Trade war (tariffs on imports), Trumpcare, and tax cuts / infrastructure spending are merely paths to his goal (America first).
Right now Trump’s “America first” goal is going nowhere because all of his paths are blocked.

  1. Across-the-board tariffs are increasingly unlikely.
  2. Trumpcare is dying in the Senate.
  3. Without Trumpcare, Trump will have a really hard time passing tax cuts and infrastructure spending.

So if Trump is stuck, what can he do to accomplish his “America first” goal? Perhaps he’ll devalue the USD. Currency devaluations boost exports. There is certainly precedent. Reagan devalued the USD twice in 1985. The first devaluation coincided with the U.S. dollar’s EXACT top in early 1985.
Here’s the USD Index. Note that the axis has been multiplied by 100x.

Reagan acted in coordination with with the G7 in 1985 to sell the USD.
Let’s assume that Trump will devalue the USD. How will he do that? Who knows.  Focus on understanding what Trump wants to do. Let Trump figure out the “how”. As hedge funds, our job is to simply understand what Trump’s goals are and understand how Trump’s goals will impact the markets.
*Our sister fund doesn’t think that Trump will initiate a new round of quantitative easing via the Fed chairman to devalue the USD. Trump can (and probably will) replace Yellen next year. But it’s really hard to justify QE at this late stage in the economic expansion. (Our medium-long term model says the current bull market in stocks and economic expansion have 2-3 years left.)
7 am: the Euro is more bullish than the Yen or CAD. 
As of 7:15 am, EURUSD is flat while USDJPY and USDCAD are up. (USDCAD is up because oil is down 1.2%). This is actually a bullish sign for the USD Index. 57% of the USD Index is Euro. Despite Yen and CAD weakness, the Euro is resilient.
Germany’s manufacturing data was strong last night. Europe’s economy continues to improve. The Euro is in a bull market because money flow is moving from the U.S. to Europe.
7 am: Will silver retrace 61.8% of its flash-crash?
Flash crashes are often followed by a 61.8% retacement or a retest of the crash’s low. Here’s an example from December 1 2014, when silver flash crashed on a Sunday night.

We’re starting to see this retracement right now. Silver has retraced 50% of its post-flash crash bounce.

Silver’s 61.8% retracement is at $15.
Our sister fund noticed something interesting. Silver’s big down days are all happening on low volume hours!

  1. June 26: silver tanks after the U.S. market closed at 4 pm.
  2. July 7: silver tanks at 7:05 pm, when the Japanese market just opened and volume was extremely low.
  3. This morning: silver started to selloff at 2 am on low volume (it’s a Monday morning).

Why are these selloffs starting on low-volume time and not American time? Our sister fund thinks that this is a bullish sign. In a bear market, gold/silver need to fall on American time. The U.S. is still the world’s main financial force.

Bottom line

  1. Our sister fund thinks that the U.S. dollar (USD Index) is in a bear market. Money Flow determines the U.S. dollar’s bull/bear markets. Right now, money is flowing away from the U.S. to Europe and emerging markets.
  2. Our sister fund thinks gold and silver are in new bull markets. Gold/silver surge when inflation is about to surge. Our sister fund is 100% long USLV (3x silver ETF). They make medium-long term investments.

3 comments add yours

  1. again this nameless mysterious “sister fund”. what is this siter fund that you citate???

    • It’s run by my cousin. Not open to outside investors (besides a few close family and friends).

  2. Thanks, I’ve been reading your newsletter for a couple weeks now. I like the commodity sister fund posts. You’ve got my interest, I’ll keep reading for now.

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