Nov
6

Emboldening Currency Traders

I think many traders were surprised to see the market reverse and go higher in the face of a bad employment report. Some might try to explain it by saying the employment report was priced in. I beg to differ.

This is what I am taking away from this morning’s action. I mentioned in prior posts to think of this stock market has a “government bubble.” The US Government’s intervention in the marketplace is the fundamental factor driving the stock market higher. It isn’t corporate earnings or an economic rebound. The bubble will ultimately blow up like all bubbles; however, we’re still in the inflation stage and therefore the market anticipates higher prices. It doesn’t matter if the foundation is faulty.

The market is up right now because the Fed telegraphed that it would keep interest rates at 0% so long as the economic recovery is in doubt.

The translation is that the Fed is willing to kill the US Dollar.

Today we got a poor employment report. This translates to continued inflation of the government bubble because the recovery is in doubt. This is actually good fundamental news for the government bubble.

This emboldens traders/speculators that are long higher interest rate currencies and short the US Dollar. The currency traders  feel more comfortable today that they can continue to short the US Dollar. The threat of an interest rate hike has been pushed into the future.

 

udn_018

The dollar is declining again today. There is no flight to safety as one might expect. Why? This is the perfect environment for slamming the dollar. The economy is on firm enough footing where speculators are not risk-averse for chasing returns. But, the economy is weak enough that speculators have comfort that interest rates will not be going up in the short term.

 

gld_002

GLD is up again too. As the dollar declines, gold is becoming a money store. Gold also benefits from the declining dollar because even if the nominal value of gold is stable, as the dollar declines, it goes up when denominated in dollars. This same factor drives up the prices of other commodities such as oil even if there isn’t an increase in demand for the commodity.

In short, so long as the economy stays on firm enough footing to not alarm people but stays weak enough to keep interest rates at 0%, the US Dollar will continue to decline and assets denominated in Dollars will continue to inflate – including stocks.

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  • rlamura
    Thank you for your analysis! I was just wondering if a widely perception about investing in gold and gold related stocks because of future growing inflation and short the dollar because an ever increasing budget deficit in the long term and an interest rate spread is a sign of topping action in a short time;
    What do you think? thanks!
  • Sorry for the late response. I missed your comment. I think too many people buy into being a contrarian and judging sentiment. For example, in 1997-1998 every idiot in the world was talking up the stock market and the Internet. Many might have thought "this is a crowded trade and everyone is in it and I'll bet against it. Well, these bubbles that the public crowds into can last for years.

    So even if gold is becoming a bubble and popular sentiment is behind gold, it doesn't mean it can't go higher with the public's euphoria behind it for years.

    I would say that sentiment reading works best when they are at irrational extremes. An analog would be an indicator like RSI. At 70, a stock is considered overbought. However, this doesn't mean the stock can't go much higher for a while and remain overbought. Yet, when RSI gets 90+ it becomes irrationally overbought and and a correction becomes a certainty. But, you don't get many 90+ RSI readings. The same goes with sentiment. It hardly ever hits those extremes where it can become an accurate tool for short term trading.
  • JoeMarc
    Hi, I assume your long then based on your commentary that folks are not so worried
    " so long as the economy stays on firm enough footing to not alarm people but stays weak enough to keep interest rates at 0%, the US Dollar will continue to decline and assets denominated in Dollars will continue to inflate – including stocks"

    If so, and your long, are you Long US Markets and CDN markets being the TSX, OIL, Materials ??

    Thanks
    Joe
    Toronto Canada
  • I haven't repostioned myself in either direction yet. I'm still hedged. This is my hypothesis as to what is going on but ultimately I want to see the dollar regain its trend or break the 50 day SMA before I start getting long or short. I am long GLD, COW, BAL, xLE and I also added a position in USO a little while ago.
  • Gov't bubble-lolz, -you need to trademark that!
  • rosocecasita
    Thank ya for the update!
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