When Will US Dollar Peak?

07/29/19 08:33AM EDT

“The first biological lesson of history is that life is competition.”
-Will Durant 

When will the US Dollar (which is currently re-testing both 2-year and Global #Quad4 Cycle highs) peak? As Jim Rickards and I reviewed in a Real Conversation on Friday, Fed rate cuts don’t happen in a vacuum. The #CurrencyWar is a competition. 

Who can either A) stop #slowing first (China, EM, Europe, UK, Latin America) and/or B) not be Dovish Enough while world markets are picking their winners and losers? As Durant went on to write in The Lessons of History (in 1968): 

“The second biological lesson of history is that life is selection… inequality is not only natural and inborn, it grows with the complexity of civilization” (pg 21). Inequality is currently perpetuated by you and I being forced to chase centrally-planned (Fed) asset price reflation while the rest of America pays for that in cost of living terms. 

When Will US Dollar Peak? - z hedgeye currency wars

Back to the Global Macro Grind… 

Yep, that’s a little deep for a Macro Monday @Hedgeye … but it’s something “long-term” and secular to think about while your short-term risk management exercise is to play a game of chicken with a widely expected “rate cut” on Wednesday. 

In terms of contextualizing last week’s Global Macro moves within the lens of intermediate-term @Hedgeye TRENDs, let’s start with the always important (and misunderstood) Global Currency market: 

  1. US Dollar Index was up another +0.9% last week to +3.5% year-over-year and remains Bullish TREND @Hedgeye
  2. EUR/USD was down another -0.8% last week to -3.0% YTD and remains Bearish TREND @Hedgeye
  3. Yen corrected -0.9% vs. USD last week to +0.9% YTD but remains Bullish TREND @Hedgeye
  4. GBP/USD devalued another -0.9% last week to -2.9% YTD and remains Bearish TREND @Hedgeye
  5. Argentine Peso dropped another -2.1% vs. USD last week to -13.2% YTD and remains Bearish TREND @Hedgeye
  6. Aussie Dollar was down -1.9% vs. USD last week to -2.0% YTD and remains Bearish TREND @Hedgeye 

With Spanish and Japanese Retail Sales #slowing to 0.3% and 0.5% year-over-year this morning (still #slowing against easing comps), does CTRL+Print policy look like it’s solving for slower-for-longer (economically) in either Europe or Japan? 

“But the US Consumer is in great shape”… looking backwards (after 9 straight quarters of #acceleration) at the peak of the US economic cycle, no doubt! Up next, #PeakCycle comparisons for US Retail Sales in JUL, AUG, and SEP. 

In addition to pounding the Argentine Peso to -36.9% year-over-year vs. USD (yes, that’ll give you some Argentine inflation!), a #StrongDollar week also dampened Inflation Expectations, once again, last week: 

A) Commodities (CRB Index) deflated another -0.8% last week to -8.8% y/y and remain Bearish TREND @Hedgeye
B) Energy Stocks (XLE) were down another -0.5% last week to -18.5% y/y and remain Bearish TREND @Hedgeye 

This weakness was not only aided and abetted by #Quad4 Global Demand conditions but an outright #crash in Natural Gas prices (down -3.6% last week to -21.6% YTD) and broad based selling in Commodities (Lumber -5.6% last week). 

Oh, but “stocks” KM… why can’t you just look at the Dow Bro (in points) and “talk stah-ks?” No worries, I will, but since few talk “stocks” globally, let’s do that first: 

  1. Emerging Market Stocks (MSCI) were down -0.8% last week to -4.0% y/y and remain Bearish TREND @Hedgeye
  2. South Korean Stocks (KOSPI) were down -0.7% last week to -8.2% y/y and remain Bearish TREND @Hedgeye
  3. Mexican Stocks were down another -2.2% last week to -18.1% y/y and remain Bearish TREND @Hedgeye 

What’s up with the y/y (year-over-year) bro? I want to talk YTD off the worst December in the history of Decembers for only US “stocks!” Ha, I get it, but what up with that Trump “trade deal” with Mexico last year bro? 

Evidently neither a “trade deal” with another country nor “progress with the Chinese” is getting locals in either Latin America or Asia excited about “stocks.” But, in the USA, career-risk-management says you have to chase charts into month-end. 

Best looking “charts”, by far, are those making all-time highs (they all looked awesome pre Quad 4 in Q4 of 2018 too). That, they did, again, last week: 

  1. NASDAQ was up another +2.3% last week to +25.5% YTD and remains Bullish TREND @Hedgeye
  2. SP500 was up another +1.7% last week to 20.7% YTD and remains Bullish TREND @Hedgeye
  3. Financials (XLF) led with a +2.7% gain last week to +20.4% YTD and are Neutral TREND @Hedgeye 

Sometimes subscribers get confused when my SIGNALING #process is opposite of what the RESEARCH #process (Quads) says to be considering. That’s why I do both. SPY has said Bullish @Hedgeye TREND for months now in every one of these notes. 

Great week for the Financials (because rates were up, across the board, on the week)… and a correction week for my Utilities (XLU down -0.7% on the week), but I definitely wouldn’t chase bank stocks here. Short more. 

Looking at year-over-year (y/y) #FullCycleInvesting Returns will matter more and more as we compare against the final #PeakCycle months of AUG and SEP of 2018: 

  1. Utilities (XLU) have a year-over-year return of +13.9%
  2. Financials (XLF) have a year-over-year return of +2.0% (all of it came last week)
  3. Russell 2000 (IWM) has a year-over-year return (loss) of -5.1% 

For Longer-term Investors looking to preserve and grow their wealth (by not having 20-30% draw-downs) the first lesson of market history is stay with the Quads across the Full Investing Cycle. Sector and Factor Exposure selection is critical too. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND SIGNALS in brackets) are now: 

UST 10yr Yield 1.99-2.13% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 8119-8354 (bullish)
Utilities (XLU) 59.00-61.31 (bullish)
REITS (VNQ) 86.96-89.90 (bullish)
Financials (XLF) 27.56-28.77 (neutral)
VIX 11.54-15.80 (neutral)
USD 96.30-98.21 (bullish)
EUR/USD 1.10-1.12 (bearish)
USD/YEN 107.30-109.12 (bearish)
GBP/USD 1.23-1.25 (bearish)
Nat Gas 2.12-2.37 (bearish)
Gold 1 (bullish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer

When Will US Dollar Peak? - CoD Currency War Competition

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