Forex & commodities on July 13, 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

  1. Inverse correlation between U.S. dollar and interest rates.
  2. Euro’s main problem is still its COT report.
  3. Some short term gold/silver weakness.
  4. EURUSD needs a trigger to breakout from its resistance.
  5. Gold and silver are breaking out from their 200 hourly moving average resistances.

5 pm: inverse correlation between USD and interest rates
Since the Trump election, the USD Index and interest rates (10 year, 2 year yield) have had a modestly positive correlation. But since mid-June 2017, the USD and interest rates have had a negative correlation.
Here’s the 20 day rolling correlation between UUP (USD etf) and TLT (ten year bond). A negative correlation = positive correlation between USD and yield. A positive correlation = negative correlation between USD and yield.

This is normal for USD bear markets that are driven by inflation (here’s how inflation impacts the USD). When the economy is on the path to inflation, the USD goes down and interest rates go up.
The 2 year Treasury yield is a better indicator for inflation than the 10 year yield. The yield curve tends to flatten as the economic expansion ages (i.e. 2 year yield rises faster than 10 year yield).
Here’s the USD Index

Here’s the 2 year Treasury yield

5 pm: Euro’s main problem is the COT report
EURUSD is stuck at this resistance because “smart money commercial hedgers” are extremely bearish on the Euro.

If the USD is range-bound or still in a bull market, this would be a bearish sign for the Euro. But if EURUSD is in a bull market and the USD Index is in a bear market, the COT report is meaningless. Hedgers are often forced to cover their short positions as the market rises in a bull market.
5 pm: some short term gold/silver weakness
Gold and silver are facing some short term weakness. Gold and silver are capped at their 200 hourly moving average resistances. Markets rarely break through these resistances on their first try.


This weakness is to be expected. As our sister fund mentioned yesterday:

Silver flash-crashed on July 7. Bottoms after flash-crashes are rarely V-shaped. The market usually faces some short term resistance over the next few weeks before rallying.

After silver flash-crashed on December 1, 2014, it bounced and retraced 61.8% of the bounce.

A 61.8% retracement today brings silver to $15.

Silver and GDX massively underperformed gold today. Short term bearish sign. (Blue is GLD, yellow is GDX, red is SLV)

Hence the gold:silver ratio went up.

The commodities sector as a whole is trying to make a bottom.
Here’s WTI oil.

Here’s copper.

Here’s DBA (agriculture ETF), stuck at its 200 daily moving average resistance.

7 am: EURUSD needs a trigger to breakout from its resistance.
EURUSD is stuck at its $1.144 resistance. This is a big resistance.
Here’s the intraday hourly bar chart.

Here’s the weekly chart.

Perhaps the ECB’s meeting next Thursday July 20 will push EURUSD above this resistance. There won’t be anything too unexpected at the next ECB meeting. The ECB will not hike rates.
Recently the currency markets are moving according to the nature of their triggers.

  1. Mario Draghi said nothing unexpected in his speech on June 27. Everyone knows that the ECB will eventually have to tighten monetary policy. However, EURUSD still went up on this news/trigger. Draghi said that the ECB will continue its current course and that the EU might start winding down the stimulus as the economy picks up.
  2. Bank of Canada hiked interest rates yesterday. Everyone expected this. USDCAD still tanked.

7 am: Gold and silver are breaking out
Gold is breaking out above its 200 hourly moving average. Silver is trying to break out.


Support/resistances aren’t useful in the precious metals markets. There are too many false breakouts and breakdowns. Our sister fund stands by their statement from yesterday:
Silver flash-crashed on July 7. Bottoms after flash-crashes are rarely V-shaped. The market usually faces some short term resistance over the next few weeks before rallying.

Bottom line

Nothing has really changed since our sister fund’s July 12 market outlook.

  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 bull markets.
  3. Our sister fund has been 100% long USLV (3x silver ETF) since June 30, 2017. Entry price: silver was at $16.62, USLV was at $11.84.
  4. Our sister fund makes medium-long term investments.

Leave a Comment