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“Every parting gives a foretaste of death, every reunion a hint of the resurrection.”

— Arthur Schopenhauer

Commentary Analysis

The “Three Calm C’s” suggest the dollar likely ranges for a while still

If you’re a longer term trend follower, and you trade the US dollar index using an exchange traded fund, or the listed futures contract, you may not be a happy camper. The dollar index peaked at 99.21 back on the 13th of March 2015, just over a year ago. Since then, the index has been ensconced in a maddening range. From a wave perspective, it appears price action is tracing out some type of corrective wedge pattern. Once completed, it will set the stage for another trend move. My guess is the bull move will resume once this wedge is complete …

…but this maddening range could be with us for a while.

Why? Because of the “Three Calm C’s” so well described by Joachim Fels, global strategist for PIMCO, and for many years prior toiled away at Morgan Stanley. I always liked him. He seems grounded in reality; and has an excellent grasp of global macro IMHO.

[Note: Though Mr. Fels is better positioned than I am to make such a determination, I disagree with his contention there was some implicit agreement at the G-20 to stabilize the US dollar. As I said to our subscribers in a recent note—the G-20 can’t even agree on the type of wine and cheese they want on the hors d’oeuvre menu.]

Mr. Fels “Three Calm C’s” make a lot of sense to me; maybe because it dovetails nicely on my current intermediate-term outlook, much of which I have been sharing here lately. The three C’s are:

  1. China
  2. Commodities
  3. Central banks

Unlike some other commentators who seem to believe China crisis is inevitable, I don’t. For the reasons enumerated in Currency Currents on March 13th; Lurching from nirvana to crisis; our dogma is barking? So, if crisis is avoided at least for a while, then it’s unlikely we will see a major risk-bid into the US dollar (which will likely at some point be one of the drivers for the next trend move once this maddening range is complete).

I have been expecting a playable multi-week or -month move thanks to China stabilizing and prices lurching deep into “oversold” territory, as indicated on our blog post, Commodities Turning? The negative correlation between commodities and dollar remains intact; not anything like it was during those the old “risk on” and “risk off” environment, but still.

I have shared our $50 oil forecast. And interestingly the oil-US dollar index 21-day correlation has risen sharply and is now at 87%–that is tight. So as oil stages a pull-back, in what we expect is a minor correction on the way to $50, we see the dollar strengthening, i.e. moving higher in minor wave D as labeled in the chart above. So, if oil rallies again, we expect it to coincide with another pull-back in the dollar—tracing out what we have labeled Wave E in the dollar index chart above; it will be a good time to start playing the commodity currencies from the long side once again.

And of course the last C is central banks. What more can be said about our illustrious monetary mavens. I would only add this: I agree we are now off into monetary policy never-never land and the opportunity for unintended consequences abound, but the juice the banks are providing continues to support financial assets. And though I’m extremely skeptical, it is possible negative interest rate policy may force more money where it is needed, into the real economy. In addition, with global central banks pushing rates deeper into negative territory seeming by the day, it will be hard for the US Fed to be overly aggressive given they signaled their role as defacto world central banker trumps its US role.

Thus, if financial assets and real estate remain afloat, a panic move into the dollar will be delayed. Given my bent toward the Austrian School, it’s difficult to watch this monetary madness playing out without thinking the end is near. But it is quite amazing how long governments and their central bank allies can keep the balls in the air. So far, a lot longer than most concerned citizens expected. And the juggling act is still in session.

Keep in mind, just because the dollar index is ranging doesn’t mean we aren’t seeing excellent short-term trading opportunities in FX—we actually are, evidenced by a very good month for our forex service. But for longer term US dollar index trend followers, the ebb and flow of angst seems likely to continue for a bit.