In our various articles during 2018 we were amongst the few commentators that correctly called the rally in the US dollar.
Indeed the US currency rose from 1.255 in April 2018 to 1.1301 in August and October, a 10 % appreciation over the 8 months period.
Our rationale was and had always been based on interest rates and growth momentum differentials and we remain structurally long-term positive on the US currency for now.
The long term chart shows that when we made that call, the EUR was hitting the upper boundary of its long term downtrend channel and reversed its course.
The currency re-entered its pivotal horizontal consolidation channel between 1.05 and 1.15 and the long term trend, as indicated by the MACDs is down.
However, we have probably reached a point where the US currency could tactically weaken for a few months before resuming its structural uptrend sometime in Q1 of 2019.
The 2018 strength in the US dollar coincided with a period of strong acceleration of the US economy, powered by Donald Trump’s Tax cuts and by strong consumption.
The US consumer never felt that good. The labor market has never been that good since 1969 and 10 years of rising real estate prices and stock market induced a major feeling of well-being and wealth effect.
The employment report to be published tomorrow is expected to show another 200’000 new jobs and unemployment at 3.7 %, if analysts are right.
The strength in the US dollar also corresponded to period where US equity markets outperformed European, Japanese and Asian equity markets strongly, attracting flows of capital into the US currency.
Likewise, US bond yields rose sharply over the period, widening the gap with zero to negative bond yields in Europe and Japan, making capital flow towards the US dollar
All these phenomena are ending…
US economic growth is bound to slow from the red hot 4.1 and 4.3 % achieved in Q1 and Q2 and Q3 was already reported at 3.5 %, meaning that the one-off effect of the US tax cuts is already fading.
Donald Trump’s politically-motivated trade war with China is starting to have adverse consequences on investments as CEO’s live in uncertainty and have started to look at alternative industrial strategies outside of the USA.
US consumption is bound to slow sharply in Q4 2018 as the October equity rout caused damages to 401-Ks and to the feeling of well-being of the American consumer.
October 2018 was one of the worst month on record for the overly-confident US individual investors. Most assets declined and declined heavily.
Moreover, the leaders of the entire bull market – technology stocks – were hit extremely hard, severely denting the Buy-on-dips mentality that had powered this bull market for the past 10 years.
In October, the selling pressure was relentless. The S&P 500 declined on 16 out of 22 days of the month, the worst of any month since 1970 and the 3rd worst continuous sequence of selling of all times.
2018 is the first year since the 1970s where 80 % os asset classes have underperformed cash !!!!
Coming back to the US dollar,
US equities have now entered a bear market that will make them underperform foreign markets, and US bond yields will probably remain stable to weaker for some months now.
Both will probably be reversing the flow of funds against the US Dollar.
This fundamental analysis is confirmed by technical analysis.
In the past few day, we have seen the development of important turning points in many currencies, all at the same time, the latest being the British pound yesterday and the Australian and New Zealand Dollars today.
GBP – British Pound
Sterling made a very significant reversal yesterday marking a marginally higher low and double bottom with the August Low. The short term moving average is pointing up and a “Golden Cross” is developing.
AUD – Australian Dollar
The Australian Dollar is clearly putting in a significant bottom after its continuous fall since the 26th January 2018 – interestingly enough the very date of the peak of global equity markets.
Selling pressure has abated, a double bottom is in place and it is only a matter of time before the currency breaks the downtrend.
The behaviors of the AUD also mirrors the savior of global commodities which have been in a bear market since January. A turning point may also indicate a turning point in the global commodity complex.
NZD – New Zealand Dollar
The picture of the NZD is more correlated to the one of the other basket of currencies and we are clearly making the turn with a solid bottom made in October. The currency is now holding above its ST moving average and has broken the downtrend.
Most emerging markets currencies have already turned or are in the process of turning.
August 2018 saw a panic flight of capital out of countries targeted by Donald Trump sanctions.
Calm has come back and most currencies are now back on an positive trend or are making significant bottoms, confirming that capital is starting to flow back to these currencies.
TRY – Turkish Lira
RUB – Russian Ruble
ZAR – South African Rand
INR – Indian Rupee
IDR – Indonesian Rupiah
When it comes to major currencies, things seem to be turning right now.
DXY – US dollar Index
The US dollar Index recorded a reversal yesterday, juts after attempting to make a new high. Failure to hold above the August 2018 high will send a very bearish signal.
EUR – Euro vs US Dollar
The EUR failed to challenge the August 2018 Low and marked a reversal yesterday. A break of 1.14 would be a very strong BUY signal.
CHF – Swiss Franc
There again, the US dollar recorded a reversal yesterday while attempting to recors a new high against the Swiss currency . Failure to hold above the May 2018 high will send the Swiss currency sharply higher ( USD lower ).
JPY – Japanese Yen
The Japanese Yen has always been a proxy for risk-off trades and tends to depreciate when the markets are in risk-on mode.
We are bearish the Japanese Yen against the US dollar structurally, but yesterday marked an important lower high in the US dollar.
Japanese YEN versus the EUR
Maybe the most telling chart is the EUR-JPY chart where we have a clear signal that the EUR is about to start a phase of outperformance vis-a-vis the Japanese Yen.