For currency traders out there, it is plain to see that many of the major currencies are right back at the same levels they were a year ago today. Last year, the US election was looming, and Clinton was a shoe-in for the presidency. Trump was elected, the USD and equities went nuts, due to "Make America Great Again." The Fed is going to start trimming back the balance sheet next year. This peaked at the end of December and has been pulling back ever since.
What Conditions Have Been Changing Throughout the World to Make This Happen?
Overall, economic conditions throughout have been improving. Last year, around this time and into the fall, we had:
- Trump election/FOMC hikes
- China stimulus
- Improving economics in the major countries
- The light at the end of the tunnel for worldwide QE
Where Do We Go From Here?
My specific thoughts are that, as long as economies continue to improve and crises are averted, all the major currencies will over time drift up. The macroeconomic world is not a simple place; there are many moving parts in play at all times and anything can happen at any time. Things that range from technological advances, war, the breakup of unions, bankruptcies, and well, you get the point.
With half of 2017 under our belts and the USD at lows it has not seen in a year, I am looking for a rebound in the dollar index to come over the coming month. Price is at a point of resistance now, but could see another one dollar down to 94 before that happens.
Beginning in July, I will be watching carefully for consolidation in the dollar index and the correlated moves in the major pairs. For now, we watch the carnage and the circus media as they blame Trump and the Russians for all of the US perceived problems. Even after the taper tantrum, I believe that trade is going to move from deflationary to inflationary, meaning that it will soon be time to pull money out of assets that have benefited from QE measures, such as companies participating in buybacks to bond premiums, and functional commodities. The deflation trade has been more profitable than the inflation trade for about 30 years, hit equilibrium with the inflationary trade during the Great Financial Crisis and exploded into the present. I am expecting some of the profitability from this trade to move into more inflationary aspects of the economy such as yields, currencies and commodities over the coming years, with central banks talking up volatility and inflation. This last dollar devaluation could be it for a while to come with much higher prices on the horizon. For now, we will take it one step at a time, place trades and reassess as we go.
Positioning for the Foreseeable Future
I will be looking to scale into long dollar positions over the next two weeks, mainly in the NZD/USD, AUD/USD, EUR/USD and USD/JPY. At the moment, my USD/JPY target is 113.75 and stepwise up to the Dec. high around 118.75.
Technically, this chart is a screaming buy to me; sentiment at the moment does not agree. The exuberance over Trump being elected, Fed tightening and tensions in other parts of the world largely helped the last move up. If we pay attention to forward yields as well, roll adjusted yields are predicting higher rates for some time to come. If the US continues to do well, the USD is going to strengthen over the coming years. This will push currencies from other countries down. I see the DX getting back up to the 104 area and then on to 107 over the coming 12 months.
- The Yen - Japan continues to be in a state of central bank induced deflation without an end in sight. I am expecting the yen to do poorly over the coming months and the USD/JPY to continue higher even if the USD does not turn out to be that strong.
- The Euro - While the ECB has cut back on its QE talk, it is still not talking about rate cuts, and with the EUR/USD back at last year’s highs, I do not ascertain that it will move much higher unless we get actual taper talk from the ECB in September. Prices show that the market is in fact looking for this wording from Draghi, but I do not think he will deliver and the EUR/USD will move down even with decent economic data coming out of the eurozone.
- The Australian dollar just hit the top of a multi-year channel. Australian economic data has not been all that bad, but it has not been stellar either. The recent rally is mainly due to the drop in the USD, a rally in industrial commodities and improving conditions in China.
- The New Zealand dollar is one of my favorites in this group to start to get short. The recent price action has been more or less parabolic and mainly due to the drop in the US dollar. Its economic data has been OK of late, but I expect this economy to be lagging even that of Australia for some months to come.
I expect the USD/JPY will hit the bottom of the blue box over the next few weeks at 115; it could have a pullback from there and then continue north to the 122 area.
I expect the EUR/USD to retreat back down to the blue highlighted box below 1.085 over the next 4-6 months. It is possible for this to make a run for 1.16 first. I will be looking to scale into a position as the USD consolidates and turns over the next week or two.
The AUD/USD chart is pretty simple. We are at the top of a channel, and it looks like the closing candle for today will be a spinning top. This is an indication that price is stalling, and follow-through to the upside is simply not there. I will be looking to enter this on the short side next week and hold it for about a month, with a reassessment around 0.74.
This chart shows a breakout from resistance, but if you study the price action in this pair, it often overdoes itself only to experience more losses later. It is common for retracements in this instrument to be close to 100% on the daily time frame. I have started to enter a core short position. I am starting out small, as it still has the opportunity to run to 0.743 before turning as that would be a retrace of the high last September. I plan to add to and hold this position for 1-2 months.
In conclusion, this first week of July, I am looking to enter short positions around the current levels in AUD/USD and NZD/USD. I am waiting on the euro to see if it will run up to 1.16 before having a pullback, and I am looking to get long the USD/JPY next week as well. Monday through Wednesday, I will be looking to the DX or USD to move up as well as the US 10-yr yield. These will be my signs to enter or add to positions mentioned above.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am currently starting to enter longer-term long USD positions in the AUD/USD and the NZD/USD.