Crack!
That sound you hear is the dollar index cracking. Has it peaked? The reaction from this week’s dovish Federal Reserve meeting was delayed. But it finally came yesterday. Crude oil rose by 4.5%. The Dow Jones Industrial Average finally regained positive territory on a year-to-date basis. It closed at 17,481 and is now up 0.32% for the year.
The move in stocks and oil was notable. It showed dollar weakness. But what about the dollar against other currencies? Charlie Morris was in early this morning, beavering away on the Bloomberg terminal. He then arrived at my desk in a somewhat agitated state and asked:
“Dan, do you want to hear something that will blow your mind?”
“Go on then.”
“The US dollar is below its 30-day moving average against 97% of currencies,” he said. “It’s nearly everything. Even Argentina. 77% over 200 days on the Argentine peso. It’s looking like a dollar peak.”
“What does that mean?” I asked.
Charlie said it could be like 2002 again. In other words, a peak in the dollar has massive consequences for Charlie’s “momentum crash” thesis. It means the small move we’ve seen so far is part of a much bigger move. How big? See below.
The peak-to-trough correction/crash in the dollar from 2002 to 2008 was 40%. The cash settle index fell from around 120 to 72. The current dollar rally – driven by investors expecting a “normalisation” of US interest rates – hasn’t taken the index to a new high. But it’s looking pretty nervy, isn’t it?
Meanwhile, you have oil, emerging market currencies and commodities all enjoying a nice little run. If it’s more than a nice little run, the dollar will fall further. Just why it might do that is an intriguing question. No US rate rises this year? Political risk from a Trump presidency and a summer of civil disobedience on the American streets? Or something else?
You can’t really know “why”. But you can know “what”. For that, let’s turn to Charlie’s latest momentum crash snapshot. The chart below shows that biotechs, healthcare and internet stocks (the top three lines) are rolling over. But the bottom three lines are oil, Latin American stocks and mining stocks. They’ve turned sharply up.
That’s why the momentum crash idea is useful. It shows you where the money’s going. And it can help you spot a sharp reversal in trends. If we have a proper momentum crash, the losers will start winning a lot more.
Category: Economics