The Japanese yen (JPY) has been making some very interesting moves against other currencies recently. I’ll cover that scenario in detail later in this report, but first a few words on the world’s reserve currency: the US dollar.
That’s because if you’ve been my weekly reports for the last several weeks, you’ll know that I’ve been very bearish on the US dollar. I practically called the top of the dollar during the height of the coronavirus panic in March.
That was when everyone rushed into US dollars because of fear. Everybody in the world was selling their assets to buy dollars.
But before I look at the US dollar chart, I want to give you a background idea of what’s happening and why. Now I’m not a fundamental trader, of course. I don’t really care about the “reasons why”, but there’s a lot going on right now and so it’s useful to point out a few things.
What exactly is driving the US dollar lower right now?
In the bar graph below, we can see that US interest rates are now showing negative real yields. Even though they’re showing a positive yield “nominally”, when you subtract the inflation rate the “real return” is actually negative.
In fact, all the world’s central bankers are in this race to the bottom for interest rates. We’re heading into negative interest rates and frankly into uncharted territory together.
Certainly in the US, we’ve never experienced negative interest rates and this is a key reason for the fall in the US dollar.
For example, right now the five-year Treasury Note yields 0.264%. But when you subtract US inflation you’re left with a negative rate of return as shown here. The same is true for the seven year, the 10-year, the 20-year, and even the 30-year Treasury yields.
Now clearly a negative return is undesirable.
So investors will sell the US dollar for other assets and this fall in the US interest rates and the dollar has coincided perfectly with the rise in gold:
Right about the time rates started going negative, gold took off from $1,500 to just over $2,000 right now. The correlation between the two events is very strong.
All this is a function of the US Federal Reserve adopting the “whatever it takes” posture. During the height of the epidemic, they knew they had to act and act quickly. And cumulatively the US Federal Reserve and Congress together have issued about $10 trillion of stimulus in the last few months.
But they’re not done yet. Currently, Congress is mulling over another $1-3 trillion in the additional stimulus. All this has put huge pressure on nominal interest rates in the United States and there have been soaring asset prices in response.
This is setting up a condition of stagflation where you have depressed economic conditions along with rising inflation. This is a terrible outcome for savers and investors who aren’t aware of what’s going on.
Fortunately, you’re aware now, which is why I’ve pointed this out. Stagflation is a real danger in times to come.
Now having said all that, let’s take a look at the USDI (the US Dollar Index), which tracks the US dollar against a handful of the most liquid currencies.
The rush into the US dollar at the height of the pandemic correlated to a breakthrough above a major resistance area and yet this rally has turned into a bull trap where anybody chasing this market was trapped.
It’s important to note when these happen because once traps are sprung, the market tends to move the other way in a hurry (i.e. down, in this case). Which is of course what we’ve seen over the last few weeks.
So where does the US dollar go from here?
It’s already come very far, very fast and further declines seem almost inevitable. However, the dollar has had a pretty good run and I’m also a bit skeptical of August trading conditions.
That’s because August is when most Europeans go on vacation and while they may continue to do so this year, numerous travel restrictions and general pandemic fear may mean they’re not going anywhere this August. So I don’t know if August 2020 will be typical.
Normally August is very much a consolidation month where prices go into narrow trading ranges and refuse to break out. Will that happen this year? For now, I’m taking a “wait and see” approach.
In the meantime, we can observe the bearish head and shoulders in USDI:
Head and shoulders are typically reversal patterns so I would expect USDI to drop lower over time.
However, prices have broken through the neckline already. We often see a retracement and re-test of that neckline after that happens. Then the new downtrend begins in earnest.
So I wouldn’t be surprised to see a rally in USDI in the short term and therefore I wouldn’t be keen on shorting USDI at the moment. If you’ve got some gains from being short USD right now, I’d be inclined to take partial profits and look for another setup to consolidate your position going forward.
In last week’s video report, I shared that XAGUSD was about to breakout and advised all members to get involved in this trade …
… less than 48 hours later, we had scooped 4250 pips.
In this week’s video report, I see even more opportunities on the board.
I start by sharing an in-depth insight into exactly what is happening with the US Dollar and the real reasons why it’s in big trouble.
I then share the impact that the US Dollar decline is having across the market (including some monumental opportunities).
I highly encourage you to check it out.
- The real reason why the US Dollar is being driven lower right now: why the world’s central bankers are on a race to the bottom with negative interest rates (and the importance of the correlation to the rise in Gold).
- Why “Stagflation” is going to ruin the savings and investments of millions of Americans (unless they can properly prepare)
- The Bearish Head & Shoulders on the US Dollar that signifies the next BIG move (but why August’s trading conditions could delay the inevitable) – here’s what you need to be looking for – watch from 4.31
- Is this significant long-term bear market about to turn around following a “Busted Price Pattern?” (watch from 8.48)
- Why the recent move on the GBPJPY is one of my proudest trades in recent years (I share some of my key lessons from challenging my inherent biases)
- The “Higher Lows” on GBPJPY that is signalling the opposite to what we all expected and why I’m watching this trade like a hawk waiting for THIS key moment (full walkthrough from 19.47)
- This obscure Double Bottom on EURJPY that signals that this trade is about to move with a vengeance
- Following the XAGUSD’s break-out of the seven year downtrend line, Silver has made a huge rally … but what is going to happen next? I share what I’m seeing
- Plus much more
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