Dollar Resurgence

In last week’s article, I stated that Powell disappointed the markets “with little detail on the timing and tools to be used in relation to its not-so-new policy of allowing inflation and employment to run hot over the coming years. In other words, he provided nothing we didn’t know already and was presumably priced into the markets. Yet, instead of being a ‘buy the rumor, sell the fact’ event, the Fed’s announcement overcame the initial plunge in markets and stocks and precious metals rebounded higher. The key question is whether these latest rallies have just begun or are more short-term nature until the Fed provides more concrete details on their plans.”

Based on the moves down this week, especially in stocks yesterday, those rallies did turn out to be short-term only. As I tweeted earlier this week, it has become the custom that markets respond favorably to FOMC meetings and that we have to wait a day or two later to see the true reaction to the news. This is precisely what happened. The markets are now showing their disappointment. It may also be dawning on the market that despite the talk of reflation policies, and especially given the lack of details or follow-through in terms of action, it is unlikely that the Fed will press down on the pedal of the printing presses again until they have an excuse to do so, such as a sharp reversal in stocks. It looks like that is starting to play out now.

At the same time, negotiations between Republicans and Democrats on new fiscal stimulus measures remain deadlocked. This could remain the case until the elections if the Democrats plan to blame the resulting economic hardship on Trump—a plan that may backfire.

Regardless of the political implications, with far less monetary and fiscal stimulus and without a trigger to compel the need for more, it was only a matter of time before markets capitulated. After all, given the underlying economic fundamentals, the only reason markets have been rising since March has been truly massive money printing combined with exploding deficits to provide fiscal support to the masses. Take away the stimulant and eventually withdrawal occurs.

Both stocks and precious metals have benefitted handsomely from the ‘stimulus on steroids’ policies of the Fed and Congress since March, so it should be no surprise that they are heading south now. By contrast, the biggest casualty since March has been the dollar.

The DXY became extremely oversold with both the daily RSI and MACD Line reaching their lowest levels in at least ten years. It hit its lowest price in two years on Tuesday. But the series of positive divergences at lower lows in price since August coupled with record long dollar positions on the part of the smart money commercials last week signaled that things were about to change. The lack of any new action from the Fed was exactly what the dollar needed.

Since Tuesday, the DXY has rallied 1.4% from its low of 91.75, a big move for the reserve currency in such a short period of time. Given the size and duration of the decline in the dollar since March—it dropped 11%—I don’t believe the dollar is done on the upside. Although we may see lower lows first, my initial target for the DXY is 94, but my ideal target is the 97-98 region before we head down to even lower lows. Taking baby steps, I’ll reserve my big picture expectations for the dollar going forward if and when we hit those higher levels.

Even though the correlation between the dollar and Gold has been volatile recently, it has been inverse on average, meaning that when the dollar rises, Gold tends to fall, and vice versa. The inverse performance of the dollar relative to precious metals and miners since March says it all. The recent peak and drop in Gold, Silver, and the miners, and the rally in the dollar makes perfect sense with this in mind. The expectation that we see further downside in the former as the dollar rallies is reasonable too.

The targets that I shared over the past several weeks for Gold, Silver, and the Miners remain intact. For Gold, at least ~1800, Silver ~23, GDX ~37, and SILJ ~13.

However, as I have shared repeatedly, whatever the lows turn out to be, I believe this to be a fantastic buying opportunity given my strong expectation that the Fed will follow through on its inflationary policy of more massive money printing and that an agreement on additional fiscal stimulus to support Americans is inevitable. In addition, and arguably most importantly, we could see a helicopter drop from the U.S. Treasury ahead of the elections in November of up to $2 trillion dollars. All of this stimulus will be in excess of that in the spring, triggering a deeper dive in the dollar and making a spectacular rally in precious metals and miners not only likely but even more dramatic than what we’ve seen since March