Forex & commodities on July 24, 2017: thoughts & outlook


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

Thoughts

  1. The U.S. dollar is still trying to bottom at every minor support.
  2. Another reason why the U.S. dollar is in a bear market.
  3. Silver is underperforming gold
  4. The U.S. dollar is going down on Trump-Russia news.
  5. Gold and silver (gold in particular) are going up on Trump-Russia news.

5 pm: the U.S. dollar is still trying to bottom at every minor support.
Bulls are still trying to stop the USD’s decline at every single minor support.

Ironically, this is merely prolonging the USD’s pain. Had the USD been crushed consecutively over the past few days, the USD could actually use Wednesday’s Trump Jr. trigger to reverse up. Without extremely oversold intraday momentum, the USD will probably go down on Wednesday’s Trump Jr. testimony.
5 pm: another reason why the U.S. dollar is in a bear market.
Money Flow determines the USD’s bull and bear markets. However, Money Flow is an extremely complicated concept that includes many factors:

  1. Interest rate differentials
  2. Converging/diverging economic strength
  3. Converging/diverging monetary policy
  4. Difference in corporate profit opportunities.

There’s another factor that’s often ignored: the federal budget balance. There is a strong inverse correlation between the budget balance as a percent of GDP and the U.S. Dollar Index.

Notice that the Budget Balance as a % of GDP is a leading indicator to the USD. The CBO estimates that the Budget Balance will deteriorate even without Trump’s proposed pro-growth policies. This is a long term bearish factor for the U.S. Dollar.
5 pm: silver is underperforming gold
In a healthy rally, silver should significantly outperform gold and the gold:silver ratio should go down. Instead, the gold:silver ratio has been flat because gold has rallied on a “safety haven” theme (Trump-Russia news).
We can clearly see silver’s weakness today. Silver (SLV) underperformed gold (GLD), and gold miners (GDX) massively underperformed.

If USD falls on Wednesday’s Trump Jr. testimony, gold will probably spike for a few days and then make a medium term top.
There is a moderate correlation between EURUSD and gold/silver. You can clearly see that gold is stronger than EURUSD today. When EURUSD fell, gold/silver only fell a little. When EURUSD went up, gold/silver went up much more.
7 am: USD’s reaction to Trump-Russia news.
The USD’s downtrend has accelerated since Trump Jr. released his emails on July 11.

From a pure technical analysis perspective, the USD will fall at least 2% over the next 2 weeks. A 4% decline is more likely, bringing the USD Index to 94.
Trump Jr will testify on Wednesday. Our sister fund thinks that the USD will either be flat or tank on Wednesday. Our sister fund doesn’t think the USD will rally on Trump Jr-news.
7 am: Gold is going up on Trump-Russia news.
There is an inverse relationship between the USD and gold/silver.
While the USD has tanked since July 11, gold and silver have bounced. Here’s gold.

Gold is playing a classic “safety haven” theme. This is why the gold:silver ratio isn’t really going down even though gold and silver are going up (meaning that silver’s rally isn’t strong). In a truly strong rally, the gold:silver ratio should sink because silver should rise much more than gold.

If the USD crashes for a few days on Wednesday’s Trump Jr testimony and gold soars for a few days, then gold’s medium term top is probably in. Gold’s “safety haven” themes usually only last for a few days.

Bottom line

Nothing about the USD has changed since our sister fund’s July 21 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.

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