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Tracking The USD Reversal Trades: Update Of The Liquidity Models Vs. Asset Prices_July 28, 2016

Tracking the USD Reversal Trades: Update Of The Liquidity Models Vs. Asset Prices_July 28, 2016

This article builds on the issues discussed or presented in this article:

"Making Sense Of Asset Correlations Gone Wacky: How To Profit From A Forthcoming Convergence".

https://seekingalpha.com/instablog/910351-robert-p-balan/4902936-making-sense-asset-correlations-gone-wacky-profit-forthcoming-convergence

And this:

"Understanding And Interpreting The Liquidity Models: Did The US Dollar, Indeed, Peak On Friday, July 22?".

seekingalpha.com/instablog/910351-robert...

The current article directly updates this blog entry:

"The US Dollar Is Set To Roll Over This Week, Then Falls Until Early August: Update Of The Liquidity Models Vs. Asset Prices_July 18, 2016".

https://seekingalpha.com/instablog/910351-robert-p-balan/4900116-us-dollar-set-roll-week-falls-early-august-update-liquidity-models-vs-asset-prices_july-18

NOTES:

Currently, there is an out-of-whack relationship or comovement among major assets and it is hindering us from interpreting the implications of the Liquidity Models. If we can understand why these assets are acting this way, then we might just be in a position to profit from a reversion which may have just started.

The updates happen through the live links anyway, but I, for one, would like to understand the correct implications of this divergence which should allow an explanation of what to expect, basing the narrative from the implied forecasts of the models. The out-of-whack relationships are likely to introduce avenues for misinterpretation, if not resolved.

This is a chart of the divergence that we want to resolve:

This is a live link. To get an updated chart, click on the link below:

http://product.datastream.com/dscharting/gateway.aspx?guid=61fbc62f-8463-4602-b04a-a21b65bed291&date=20160728&action=REFRESH

The data have already been oriented in such a way that the value lines should be going towards the same direction -- but they don't, and that is the problem. You will note that the Brexit episode last month had the nice effect of forcing unity, but one week after the event, the divergence started to take place (see chart above).

The assets have clustered into two main groups.

First group: The US Dollar, WTI Oil and the E&P names, with USD/Yen the lead and control variable.

This is a live link. To get an updated chart, click on the link below:

http://product.datastream.com/dscharting/gateway.aspx?guid=cb427406-5044-4891-a3c8-03ff04fc8b6c&date=20160728&action=REFRESH

Second group: Markit CDX-EM (as a substitute for the HY BA) going together with Silver and the Miners, and S&P 500 Index, with the CDX-EM as control variable.

This is a live link. To get an updated chart, click on the link below:

http://product.datastream.com/dscharting/gateway.aspx?guid=2124d2b2-ca78-4cb1-95d0-fdb9ba8b0aaa&date=20160728&action=REFRESH

The primary considerations at this juncture:

Near-Term

  • The watch for a USD near-term top during circa July 22 is likely over - this may be followed by a USD decline into first half of August, then followed by another USD rally into the middle of September - the impact on asset prices all coming from the interplay of systemic liquidity and cost of funding. The movements of assets with the normal inverse correlation with the USD should trade in the opposite direction taken by the greenback.
  • The correlations/comovements of asset prices have gone haywire, so it is now more practical to look into the assets as mega-groups rather than sub-groups. Nonetheless, we still provide the usual sub-group clusters to make sub-sector comparison easier.
  • Even components of the same sub-group, say in Precious Metals, start to diverge. The current classic example is Silver and Gold. Silver is now acting as a cyclical commodity, while Gold remains trapped in its "safe haven", defensive mode.
  • August should a good month for risk assets, but the rally could be sharp and brief. The next few weeks are shaping up for swing trading at its most extreme case. No buy-and-hold warranted for the next two to three months (unless you are in the market to accumulate long positions). The expected ranges are too wide
  • We believe that the US Dollar's over-all scope to the upside is limited, but that could increase its volatility as it trades over a narrow band until late summer. The next bigger move thereafter is probably to the downside as we go into year-end.

Very Short-Term

  • Cyclicals and assets that trade inversely with the US Dollar are stabilizing, but in a few days (maybe in a day or so), these assets should make a sharp run up during the first half of August. The CDX-HY group is poised for an upside breakout (see Asset Comovements-3); it could be sharp but do not overstay.
  • The anti-USD sub-group which includes WTI oil, gold, E&P names and commodities may trade sideways for a while, but should follow the cyclicals in running up during the first half of August.
  • Equity indices are are currently trading sideways and could be outperformers during the expected rally into mid-August.

Good luck to every one!

Robert

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US Dollar TWI and Major Currencies:

Interaction of USD Dollar TWI, EUR/USD, USD/JPY vs Liquidity Models

Outlook from 28 July 2016: USD sell-off into first half of August then a recovery into September

This is a live link. To get an updated chart, click on the link below.

product.datastream.com/dscharting/gatewa...

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EM Assets and EM Currencies vs the US Dollar:

Liquidity Models vs CDX-EM 10yr Index, MSCI-EM, Brazil Real, Chilean Peso

Outlook from 28 July 2016: EM assets nears a trough, leading to first half of August rally

This is a live link. To get an updated chart, click on the link below.

http://product.datastream.com/dscharting/gateway.aspx?guid=c839b43f-e926-4f8d-a375-226cc16edc7e&date=20160728&action=REFRESH

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Gold, Silver, and Miners:

Liquidity Models, USD/JPY (Control Variable) vs Gold, Silver, Miners GDX, GDX/J

Outlook from 28 July 2016: PMs, Miners set to recover shortly, then a rally into first half of August

This is a live link. To get an updated chart, click on the link below.

http://product.datastream.com/dscharting/gateway.aspx?guid=b6cf7f58-0083-43c6-9c17-bb811fff9963&date=20160728&action=REFRESH

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Oil, CVX, CLR and APC:

Liquidity Models vs US High Yield 1-3yr vs Brent Oil, CVX, CLR, APC

Outlook from 28 July 2016: Brent, CVX, CLR, APC find troughs soon; rally into first half of August

This is a live link. To get an updated chart, click on the link below.

product.datastream.com/dscharting/gatewa...

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Base Metals (Copper, Zinc, Lead):

Liquidity Models vs CDX-EM 10yr Index (Control Variable) vs Copper, Zinc, Nickel

Outlook from 28 July 2016: Base metals looking to bottom soon, rally into first half of August

This is a live link. To get an updated chart, click on the link below.

product.datastream.com/dscharting/gatewa...

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Equities:

LIQUIDITY MODELS vs S&P 500 INDEX vs CBOE VIX INDEX

Outlook from 28 July 2016: looking for stability at month-end then a rally into first half of August

This is a live link. To get an updated chart, click on the link below.

product.datastream.com/dscharting/gatewa...

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.