The USD Index let out a roar heardacross all markets. The king of the financial jungle arrived, along with thegreenback’s largest single-day gain.
Just as the African landscape sometimesneeds to show the strongest of its inhabitants, so does the less remote butequally ferocious financial environment. This time, the USDX seems to have wonthe fight – its fangs and claws turned out to be the sharpest, and so are therallies. There is nothing left for gold and its acquaintances than to runthrough the forest… run.
Sometimes, even jackals need to findshelter to lick their wounds in patience, waiting for a better time to comeback to fight. However, they will come back eventually – they always do.
After delivering a ferocious 0.75%rally on Apr. 30 – the greenback’s largest single-day gain since Mar. 4 – theUSD Index let out a roar that was heard across all corners of the financialmarkets. And while gold, silver and mining stocks are still cackling indisobedience – as evidenced by the trios’ decelerating correlations over thelast 10 days – every once in a while, the lion has to show the jackals who he is.
To explain, as the USD Index’s recentplight elicits whispers of a new order in the currency kingdom, the greenback’sstoic behavior has been misjudged as weakness. And while the vultures circleand prophecies of the USD Index’s demise become louder, the lion is slowlymoving to his feet.
Case in point: with the zeitgeistforecasting new lows for the greenback, non-commercial (speculative) futurestraders are still holding firm. Despite the greenback’s suffering, theimmaterial decline in net-long positioning last week was relatively muted andhighlights investors’ quiet respect for the U.S. dollar.
Please see below:
Source:COT
Moreover, with prior periods of extremepessimism followed by monumental rallies in the USD Index, unless ‘this time isdifferent,’ it’s simply a matter of when, not if, the U.S. dollar feasts on theprecious metals’ overconfidence.
To explain, I wrote previously:
Whennet-speculative short interest as a percentage of total open interest (based onthe CoT data) became extremely high in 2014 and 2018, the USD Index recodedtwo of its sharpest rallies in history. How sharp? Well, let’s take a look athow things developed in the past – after all, history tends to rhyme.
Let’sfocus on what happened when the net speculative positions weresignificantly(!) negative and then they became significantly (!) positive, withoutpaying attention to any tiny moves (like the one that we saw last summer).
Inshort, rallies that followed periods of extreme pessimism include:
Thecurrent rally started at about 89, so if the “normal” (the above shows what isthe normal course of action) happens, the USD Index is likely to rally to atleast 94, but since the 5-index point rally seems to be the data outlier, itmight be better to base the target on the remaining 5 cases. Consequently, onecould expect the USD Index to rally by at least 11 – 20 index points, based onthe net speculative positions alone. This means the upside target area of about105 – 114. Consequently, a comeback to the 2020 highsis not only very likely, but also the conservative scenario.
In addition, let’s keep in mind that thevery bullish analogy to the 2018 rally remains intact. If you analyze the chart below, you can seethat back in 2018, the USD Index rallied sharply and then corrected back to(roughly) the 38.2% Fibonacci retracement level. And while the current declineis of a much larger magnitude than what we saw in mid-April 2018, the USD Indexis still following its June 2018 analogue by declining slightly below anothercritical Fibonacci retracement – the 61.8% one. Moreover, amid the greenback’ssurge on Apr. 30 – which I warned was forthcoming – the USD Index invalidatedits breakdown below the 61.8% Fibonacci retracement level. The bottom line? Thesharp reversal is extremely bullish for the U.S. dollar.
More importantly, though, when the USDIndex resumed its uptrend in June 2018 – marked by the vertical dashed linenear the middle of the chart – the measured move higher also coincided with anaccelerated drawdown of gold , silver and mining stocks.
Please see below:
To explain, I wrote on Apr. 21:
Imarked the situation from 2018 that seems similar to what we see right now witha dashed, horizontal line. Back in 2018, the pullback ended when the USD Indexmoved to its first Fibonacci classic retracement level (the 38.2% one). In caseof the current rally, it seems that another classic retracement worked – the61.8% one.
Thevery important detail about the June 2018 decline (and bottom) is that whilethis was the moment after which the USD Index’s started to move higher at aslower pace, it was also the moment after which the precious metals marketstarted to decline faster.
Atthe beginning of the year, I wrote that the precious metals market was likelyto decline and that the preceding rally was likely fake. That’s exactly whathappened.
Rightnow, I’m writing that the recent rally was also fake (a correction within amedium-term decline) and – even more importantly – it seems likely that thenext downswing could take place at a higher pace than what we saw so far thisyear. And – just as was the case in 2018 – this upcoming (fast) decline islikely to lead to the final bottom in the preciousmetals sector.
As further evidence, I warned onApr. 30 that the USD Index was ripe for a reversal. And while entering longpositions in the USD Index is an appetizing thought, shorting the gold minersoffers much more bang for our buck.
I wrote (with regard to possible longpositions in the USD Index futures):
Iwould be looking to re-enter long positions as soon as the USD Index confirmsthe breakout above the declining resistance line. At the moment of writingthese words, the USDX is already trading back above this line, so the onlything that it needs to do now is to stay there. Still, given today’s pre-marketmovement, it seems that we might even see an invalidation of the move below the61.8% Fibonacci retracement. A weekly close above both levelswould be very bullish for the short term and a sign for me to get back to thelong positions .
But– that is all based on the assumption that I would want to have any position inthe USDX. And I don’t because I think that having a short position in miningstocks provides a much better risk-to-reward ratio.
That’s exactly what we saw – a weeklyclose above both levels.
Adding even more ferocity to the USDIndex’s roar, the recent downtrend hasnot invalidated its long-term breakout. And with the long-term implicationstaking precedence over the medium- and short-term ones, the USDX’s uptrendremains intact.
Please see below:
The bottom line?
Given the magnitude of the 2017-2018upswing , ~94.5 is likely the USDIndex’s first stop. In the months to follow, the USDX will likely exceed 100 atsome point over the medium or long term.
Keep in mind though: we’re not bullish onthe greenback because of the U.S.’ absolute outperformance. It’s because theregion is doing (and likely to do) better than the Eurozone and Japan, and it’sthis relative outperformance thatmatters , not the strength of just one single country or monetary area.After all, the USD Index is a weighted average of currency exchange rates, andthe latter move on a relative basis.
In conclusion, with mischievous marketparticipants nipping and clawing at the USD Index’s mane, it’s only a matter oftime before the greenback strikes back with a vengeance. And while the preciousmetals consider the USD Index’s territory up for grabs, the greenback’s prideis unlikely to stay hidden for much longer. As a result, while gold, silver andmining stocks’ gaze across the grassland, the sun has likely set on theirrecent rallies. However, once the wet season washes away the litany offinancial-market imbalances, the eventual bloom will allow the precious metalsto grow stronger in the long run.
Thank you for reading our free analysistoday. Please note that the above is just a small fraction of today’sall-encompassing Gold & Silver Trading Alert. The latter includes multiplepremium details such as the target for gold that could be reached in the nextfew weeks. If you’d like to read those premium details, we have good news foryou. As soon as you sign up for our free gold newsletter, you’ll get a free7-day no-obligation trial access to our premium Gold & Silver TradingAlerts. It’s really free – sign up today.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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Disclaimer
All essays, research and information found aboverepresent analyses and opinions of Przemyslaw Radomski, CFA and SunshineProfits' associates only. As such, it may prove wrong and be a subject tochange without notice. Opinions and analyses were based on data available toauthors of respective essays at the time of writing. Although the informationprovided above is based on careful research and sources that are believed to beaccurate, Przemyslaw Radomski, CFA and his associates do not guarantee theaccuracy or thoroughness of the data or information reported. The opinionspublished above are neither an offer nor a recommendation to purchase or sell anysecurities. Mr. Radomski is not a Registered Securities Advisor. By readingPrzemyslaw Radomski's, CFA reports you fully agree that he will not be heldresponsible or liable for any decisions you make regarding any informationprovided in these reports. Investing, trading and speculation in any financialmarkets may involve high risk of loss. Przemyslaw Radomski, CFA, SunshineProfits' employees and affiliates as well as members of their families may havea short or long position in any securities, including those mentioned in any ofthe reports or essays, and may make additional purchases and/or sales of thosesecurities without notice.
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