Let’s Talk Dollars (UUP,DBC,DIA)
We’ll open today with a look at the dollar and a few comments that the White House has been making in relation thereto.
And we start like this –
Steve Mnuchin, the President’s Treasury Secretary was in Davos this week to laugh at the world’s poor and confabulate over how to keep things humming without too much acting out on the part of the hoi polloi.
And in the midst of it all he offered the following on the sinking American dollar –
And that immediately sent the buck-sellers directly into action. The Dollar Index tanked, adding shame to the already existing scorn, and creating a picture that looked like this –
We’re going to take a minute now to unpack the above dollar chart before we get back to the White House and Dr. Mnuchin and examine where things are headed for the markets in the weeks ahead.
We begin with the oversold RSI read that occurred last week (in green). After a steep decline and a break of long term support at 91 (in red), the dollar bounced slightly but has declined to deeper lows since then – likely due to Mnuchin’s comments in Switzerland (black circle).
Those developments, coupled with the full unfurling of the moving averages and their collective descending trend (in blue), offer a perfect set-up for a near-term bounce for the buck.
More than that, a look at the weekly chart indicates that a simple Fibonacci retracement calculation, taken off the 2014 lows, puts the current decline directly on support.
Look here –
The chart shows preliminary indications of a bottom in the making.
- The aforementioned Fibonacci support line at 88.5, which we’ve just touched (in red),
- The emerging positive divergence on both RSI and MACD (in green), and
- The proximity to the long term, weekly moving average (in black), all of which point to a full throated retreat now coming to a close.
Now, there may be some play at this point around the 88.5 number, some bouncing hither and thither as the bottom is set and the long term MA rises to meet that line, but our best estimate is that it won’t be too long before we see a move higher from the dollar.
That said, there are obvious reasons why Secretary Mnuchin chose to elbow the buck, even if it doesn’t follow with past protocol from former Treasury Secretaries. As he said, there are trade advantages that accrue to American exporters when the dollar is weak, and the President has made a mantra of waging economic war against America’s chief competitors, principally China, Korea and Japan.
And that’s likely why the Trumper himself jumped into the fray a few after Mnuchin’s comments, stating –
And it was that ‘ultimately’ that spoke loudest to traders.
Because while the current administration may pay lip service to the concept of ‘unhindered markets’ and ‘letting the dollar float’ against a basket of the world’s major currencies, behind it all, they’re very happy to let the greenback sink.
At least in the near term.
That way they can deal out a whole lotta hurt on their economic rivals, gain leverage in negotiating any trade deals that are pending and generally make America great again at the expense of her biggest trade partners.
It Won’t Last
However, there’s very little chance that the dollar will remain on a downslope in the months ahead.
And that’s precisely why the White House is jawboning it lower.
Consider, too, these words from Commerce Secretary Wilbur Ross, spoken earlier in the week in response to the administration’s aggressive trade posture –
In other words, says Ross, ‘this is war’.
But there’s little the administration can do about the current, positive economic backdrop, rising interest rates, a Federal Reserve that’s keen on shrinking its balance sheet and sopping up the system’s excess liquidity, all of which are dollar positive.
The dollar will rise, and exporters will lose their edge as the new reality bites, so the truth is, there’s nothing but White House blather to keep it trending lower for the time being.
And that’s the strategy.
Now look at Mnuchin’s wife –
Sorry. Just a little turquoise humor for you, there.
Closing One Down and Posing Another
Before we offer you a play on the dollar’s imminent bounce, we have a single trade to bring to your attention. It was opened just two weeks ago on the 18th of January in a letter called Out With the Old. There, in preparation of melt-up topping action, we urged you to buy the DIA March 2nd 265 CALL for $1.91 and the DIA June 29th 227 PUT for $2.09. Total debit was exactly $4.00.
And today? We’ve seen sideways action on the Dow, but the CALL has gained slightly, selling today for $2.02.
And we say take it. Momentum is flagging, and should the index falter, we’ll cash out of our June PUTs at an opportune time, but as of now, we’re holding on to them.
Best of luck.
This week we’re betting on two separate developments occurring in line with our analysis above.
The first is a top-out on the commodities complex, which has been afire of late, moves inversely to the dollar and appears to be begging for a cool down.
The second is, of course, the near term bounce in the buck, which we pointed out is fast approaching. There’s only so much jaw-boning the White House can do on its behalf. The dollar will bounce.
And we’re going to play the trade using a couple of familiar ETFs. For the commodities, the trusty PowerShares Commodity Index ETF (NYSE:DBC), and for the dollar, the PowerShares Dollar Index Bullish Fund (NYSE:UUP).
We’re looking for the former to fall as the latter takes flight, and playing it thus –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,