First up the US$ index. Her up trend is clearly intact and has much room to run. “Operation Twist” is an attempt to flatten the yield curve, only. It has no net positive money supply implications. The Fed statement was therefore supportive of ‘risk off’ and repatriation of US$ which is should continue to drive this strong technical chart forward. Such a continuation has meaningful implications for other asset classes, of course.
Here the largest component of the dollar index.. namely the eurusd pair.
On almost every time frame the technical chart is disasterous with bounces now weak and weakening. It appears market participants are increasingly impatient with supporting the euro. Policy response has been a shambles. There is a significant long term support at 1.18 to the usd. This is likely to be tested over the summer months without meaninful intevension by central banks and or policy makers.
Completing the trio of charts. The CRB or Commodity Index.
The april 2011 bear continues to bite the commodity index. Indeed the latest bounce has been the weakest for some time and yesterday’s sell off came off a fairly oversold level. There is great weakness therefore in the commodity space. The US$ index is telling as is the ever disappointing industrial numbers that flow through month on month. Emerging markets have room to stimulate their economies but the money flow remains firmly out of commodities. From the longer term perspective the 2011 peak was a full 25% lower than the prior 2008 peak. Many commentators are calling for the cycle top on commodities off the evidence of price. Oil is below $80 and nymex copper approaching $3 again. Soft commodities are better but even many soft commodity trends are being threatened. The natural gas glut has desimated coal and further out (5 years) may impact oil prices.
Bottom line. The trio of charts are confirming what we already know. The world economy is starting to roll over yet again. Without more monetary stimulus (money printing) price levels will fall. Asset prices will fall, balancesheets will weaken, banks will once again become insolvent and government tax revenues will fall off a cliff. The downside is immense due to the amount of leverage and limited capital in the western system. Imo, the technical charts point to what should logically occur if the market were left to her own devices. Namely debt would be purged from the system. Policy makers are unlikely to let this occur so the investor, and or trader, is left looking for moments of extreme weakness in asset prices that prompt (kick) policy makers into taking action. This leads to hard and fast reversals of the ‘natural’ chart direction and patterns. Reversals are always rapid as the money flows reverse en mass, on a dime. We can expect immense volatility therefore as participants are wrong footed by policy makers vs the “natural” flows, again and again. Liquidity is key. Capital controls in this environment would be immensely damaging, note!
For the moment the window of policy action has passed so we have more weakness to come is what price technicals and the fundamentals suggest. Investor sentiment surveys do not suggest out right bearishness so the market has plenty of room to the downside here is my technical view. UBS for their part have flagged the 1330 price level on the sp500 as important. We are below this now so, for the moment, in the absence of meaningful policy measures, the pressure remains to the downside.
Of course, the usual warnings apply, its your capital, only you can decide where best to place it.
All the best
Rich
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