Trader’s Narrative

In today’s highly charged political environment, apparently everything and anything is game for the machinations of partisan political hacks. Even the US dollar has been pulled into this. So much so that it is generally believed and accepted that the US dollar is kaput, done for, worthless. And that the blame resides on the shoulders of Obama and his young administration.

But what if we step back from the raging and weeping talking heads on TV and instead of opinions, we just look at the facts?

Here is a chart of the US dollar for the past quarter century:

Reagan’s presidency presided over a boom and bust in the dollar - with the bust being the winning side. Trickle down didn’t really work but the deficit ballooned as tax cuts to the wealthy reduced government revenues. In 1989, the Republicans continued control of the White House with H. W. Bush’s presidency. While his administration managed to avoid a similar feat, the US dollar fell to new lows during the first half of his term.

The US dollar regained 50% of its value during Clinton’s presidency. You could argue that it was due to the balanced budgets and the elimination of the federal deficit. Or that it was due to the increase in the tax burden on the wealthy. There was even talk of reducing the federal debt. All that ended with the advent of the W. Bush administration.

Budget deficits and the US debt ballooned due to massive spending increases as well as tax cuts for the wealthy. The result was another major decline in the US dollar. Almost at the end of Bush’s second term the US dollar fell to multi-decade lows but recovered slightly as the last days of his administration drew to a close.

And that brings us to the present day with President Obama. He inherited an economy which almost overnight went into free fall. While I don’t agree personally with the measures taken to buttress the US economy, it bears noting that the US dollar is still above its recent W. Bush low. Also, as a contrarian, it is difficult to ignore the incredibly bearish view on the dollar right now.

So talk of a US dollar crash is either prophetic (if it becomes true) or Chicken Little-ish (if it doesn’t). And while 25 years or so is too small to make judgements on which, the Republicans or Democrats, are the better custodians of the US dollar, it is reminiscent of the counter-intuitive result of looking at the returns of the stock market under different political banners.

No, there is no free lunch. But for my US readers, there is a free trading magazine subscription in their future.. For a limited time, you can get a complimentary subscription to SFO magazine (Stocks, Futures, and Options).

It takes less than a minute to sign up and you need to provide some basic information. But as I mentioned, you need to be a resident of the US (because you need to provide a US address). Enjoy!

Earlier in this month’s sentiment overview, I mentioned a lesser known sentiment indicator called the “Daily Sentiment Index” (DSI). It is compiled and disseminated by Jake Bernstein’s firm through various “proprietary data collection methods” which include internet, telephone and/or email.

Since the objective is to arrive at a contrarian signal, pains are taken to only access retail traders and investors and to avoid professional traders. Also according to Bernstein, they do their best to survey the same base as much as possible. The resulting data is available daily on major global indices and commodities without lag by 4pm the same day. Overall, it has proven itself to be a very good contrarian measure.

Here is a recent chart of the US Dollar index along with its DSI:

Similar to other, more well known sentiment indicators (such as the AAII weekly sentiment survey), a simple question is asked: are you bullish, bearish or have no opinion. But unlike the AAII survey, the DSI is a considered ‘a proprietary indicator’ and there is no detailed disclosure of its exact nature or methodology. While you might think this opacity would make people reluctant to rely on it, the DSI has a large and loyal following, especially among the institutional crowd who don’t balk at paying almost $2,000 a year for a subscription. You can get more information on the DSI at Bernstein’s website.

For some perspective, here’s a very long term chart of the US Dollar Index with the two extreme lows in sentiment:
Continue reading ‘US Dollar Sentiment: Contrarian Bullish’

This video features Elliott Wave International Senior Currency Analyst, Jim Martens, using Elliott wave analysis to forecast the U.S. dollar’s near-term moves.

Now through May 20, you can access all of Elliott Wave International’s intraday and end-of-day Forex forecasts completely free. Access EWI’s FreeWeek.

About the Publisher, Elliott Wave International Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

To contrast the video’s short term view, the chart below shows a very long term view of the US Dollar Index. The green/red line is the US Dollar support line going back to the early 1990’s. When this important level broke, I suggested that we could see it play out as a bear trap, similar to what we saw in 1992.

The remarkable thing about this bear market has been the rally in the US dollar, taking the index back above its long term support level. At least for now, it does looks like the important break of 80 was a bear trap (although somewhat of a big one).

To get FREE forex analysis like the above video, sign up for EWI’s limited time offer (no purchase necessary, just sign up with a valid email).

Last time I wrote about the beleaguered US dollar, it was just kissing its long term support at 80.

It managed to bounce (feebily) making it the sixth time to bounce off that support line. Alas, it seems there won’t be a seventh as the US dollar has managed to fall through to close around 79.

Take a careful look at this chart of the US dollar index:

Notice anything? It isn’t the recent chart. It is from 1992. Notice how it resembles our more contemporary US dollar index? The rally at the beginning of the year and then the fall into the summer? the fall through long term support?

Catch Up
Something else we have in common with 1992 is that the short term T-Bill rate had started to fall rapidly - ahead of the Fed funds rate. Then, as now, the Fed found itself in the all too familiar game of catch up and repeatedly lowered rates to match the rates set in the freely traded fixed income market.

So what happened to the dollar? Did it crash through the floor and go to zero? Did all hell break loose? Surely with the dollar so weak and the Fed reducing rates like mad, the currency market must have taken the dollar behind the tool shed.

Well, not quite. Here’s what happened next:

Although the similarities are remarkable between now and then, there really is no reason for history to repeat. As Twain quipped, history rhymes, not repeats exactly.

My point is that right now everyone expects the dollar to crash as the Fed lowers rates. But things seldom occur the way everyone believes they should. Popular “logic” has a tendency to be ignored by the market.

And if you recall macroeconomics 101, interest rates are important but there are a few more variables that go into the valuation of currencies. I have no idea whether we’ll see the 1992 rally repeat, but frankly, it wouldn’t surprise me.

Here’s a recent weekly chart for comparison: