28 July 2020

by Rob Zdravevski

The U.S. Dollar (DXY, 93.93) is heavily oversold on a Daily basis

The AUD, EUR, GBP, NZD are all overbought. There is a prospect of an additional spurt higher in these currencies in the coming days, however you are likely to be squeezing the last juice out of this trade.

Tactically, I have been selling AUD / Buying USD at 0.68 and 0.71 and will do some more if it shoots to ~ 0.74

Silver ($24.23) is overbought on a Daily and Weekly basis

On a Weekly basis, the last two times Silver has seen these overbought levels were in mid-August 2019 and July 2016.

Copper ($2.90) is mildly overbought and it’s my preferred Short idea in the broader metals complex.

Gold ($1,935) is heavily overbought on a Daily and Weekly basis

Previous moments when Gold was this “overbought” were in July-August 2019 and July 2016. Beyond that, you’ll need to go back to August 2011 to find a similar reading.

I was wrong in the previous Gold short call in May, 2020 from the $1730 mark. That trade was closed at a 2% loss, at $1765.

Re-entering the Short Gold trade offers good probability though I think as mentioned above, Short Copper is a better trade considering the research I have done toward its relationship to price action I’m seeing in the U.S. 10 year Treasuries.

On the Equity Index front, the Nasdaq 100 10,674) has registered an extreme overbought reading in the past week, similar to that seen in February 2020.

Adding to this fact, that the Nasdaq 100 is trading at 50% above its Weekly 200 Daily Moving Average, which I consider “stretched” as this percentage spread hasn’t been seen since October 1999.

Keep in mind, that the index then fell 10% before doubling into the month of March, 2000.

It’s still worthy to note that trading at 50% above its Weekly (a long-term measure, not Daily) is a significant fact not having occurred for 21 years.

On a more subjective view, 

the narrowing breadth in U.S. stocks,

lack of confirming, mimicking new highs in the Russell 2000, Banks, Transport, Dow Jones adds weight to the S&P 500 turning lower,

the strength in the S&P 500’s uptrend is waning and losing steam,

recent aggressive buying in US Treasuries and more so EUR 10’s signify a more defensive stance,

and the “risk” indicator being the AUDJPY is soon indicating “risk-off”.

These (amongst other indicators) are confirming my cautious stance and justification of a 60% cash holding in client equity portfolios.

I don’t have any “macro” buy signals out there, however on a specific stock front, there are ideas we are close to accumulating.

* this is not personal advice

* read my disclaimer

* please seek your own advice

July 27, 2020

by Rob Zdravevski

Probability is increasing that the AUD (versus the USD) is reaching a peak.

Although its not an all in bet, my strategy has been to Sell AUD / Buy USD at 0.68, 0.71 and then 0.75 (if it touches that level) will bode well for investors.

Structurally, I am a US Dollar Bull.

Equally I was prompted to write the following comments in reply to an email received last week asking for my view about this article recently published in the Australian Financial Review.

http://www.afr.com/opinion/columns/why-the-covid-currency-shock-will-be-made-in-america-20200712-p55bgu?btis

to which I wrote,

I disagree with Stephen Roach’s argument and more so with his case being mainly based on a declining savings rate.

There are larger forces at play than personal savings rates.

The US Dollar provides the whole world with an insurance policy,

as the largest denomination involved in cross bank lending and int’l debt securities, there will be a perpetual need to buy USD to either acquire debt and/or service interest payments.

The “printing of money” is not just a USD phenomenon but rather it has been a relative exercise of increasing M2 money supply amongst many central banks.

and as Foreign Exchange is relative trade and asset, if you sell USD what is the other currency will you Buy ? The Euro ?

C’mon, why give up the safety and might of the US Dollar for Euro, Yen or Pound ?

The expansion of USD (M2) Money Supply has been omnipresent for 10 years yet the currency remains strong and well bid.

As has the expanding money supply amongst the aforementioned currencies.

At this stage, I want to paraphrase HSBC FX Strategist, David Bloom.

The predicted demise of the U.S. Dollar and reports of its death are largely exaggerated.

The Dollar has no other challengers on the world stage;

The United States just saved the world with its cross currency swaps and people think this will be its undoing.

The Dollar will remain the centrepiece of our financial architecture within our lifetime.

I’ll conclude by saying, that inversely, a falling USD will tend to correlate with rising commodity prices. It’s difficult to believe there will such rampant demand across the commodity complex over the next 2-3 years (in line with Mr Roach’s timeframe) especially within a COVID-19 world of delayed capital expenditures and frugality.

As far as the Renmimbi is concerned, its time may come in 20 or 30 years but not now.

by Rob Zdravevski

rob@karriasset.com.au