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The US Dollar About To Get Crushed?


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10-Year Note Inches Higher

The yield on the 10-year US Treasury note reached its highest level in more than 4 yearsat 3%shortly after the US opened sales last Tuesday. The majority of the focus has been on the 10-year yield in the recent sessions and it has inched its way to the psychological level which generates concerns that such a level could trigger a reaction in the global financial markets. The yield has been driven higher as strengthening inflation prospects have driven expectations of higher interest rates being set by the Federal Reserve.

Economic Growth Does Not Justify Rising Interest Rates

Right after the report was released, the US Dollar Index accelerated to reach a high of 91.79 as of Friday, April 27. This accomplished the target of the upturn channel that has been building since lows were established on February 16, 2018. The recent rally in the US dollar was in anticipation of the 10-year US Treasury note accomplishing the 3% rate. This was based on some of the recent economic numbers which have been indicating the economys resilience and increasing strength. The numbers, however, do not support such an inflationary trend or the need to raise interest rates. Recent economic growth numbers in relation to GDP were in the bottom range of expectations, which were in the 2.5% to 2.75% range, with some even as high as 3%. As GDP came out at 2.2%, it clearly signals anemic economic growth. We seem to be in the tail end of this economic cycle and the majority of the talk still falls within the boundaries of language about an economic recovery. We seem to be entering the end of this economic cycle, but we havent really seen the economic growth that justifies raising interest rates. You really have to take a serious look at the unintended consequences that such an increase in interest rates would have on the tremendous debt that the US is carrying. We are exceeding $21 trillion in debt and the simple math shows that a 1% increase in interest rates would have a profound effect on the interest payments of such debt and the ability of the US government and economy to function.

US Dollar Rises, but A Decline is on the Horizon

As we look at the US dollar basis for the June futures contract, the market on Friday made a high of 91.79 and closed at 91.34, below the trend line that points at 91.50. The market made a new high, rising into the target of the upper end of the channel resistance level, before it came back down and closed near the low to date. It appears that we made a key reversal to the downside on Friday on the US dollar. This potentially, if we get another lower close on Monday, activates the bottom end of the range at 89.30 levels, which identify the support trend line of this upper channel that has been building since the beginning of the year. Breaking this 89.30 level of support, the low made on February 16 would be activated as the next lower target. It appears that the US dollar index is counting on an increase in interest rates. But, as the old saying counsels, buy the rumor and sell the fact. The fact that the 10-year yield has reached 3% might be putting in some kind of a top on the US dollar, and if we get this confirmation of a second close Monday, it would essentially begin the corrective process to lower levels of support, potentially testing as a first target the support trend line.

Gold Rising?

The other side of the coin from the US dollar is the gold market. If you look at gold recently, the market has been under pressure as improvements in global tensions have caused gold to decline. North Korea has frozen its nuclear program. The US has paused sanctions against Russia. The recent rally in precious metals reflected the desire for safety during the period of rising political tensions recently.

More recently, if we take a look at the gold market, we can see the market came down into the low of $1315.80 as of last week, not quite breaking the low range that was made on March 20 of $1312.50. This seems to be the bottom end of a consolidation phase that is taking place in gold since the lows of $1309.30 were made on March 1. It appears that this level of $1315 to $1309 is a key level to consider adding long positions to the market as the US dollar index confirms a resumption of the downtrend. This fits into the pattern of the exact opposite reaction that the gold market should have with the US dollar: one goes up, the other goes down, and vice versa. I believe that the gold market and silver market are currencies in what I believe is a real monetary system compared to the fiat system that we have with the US dollar that lacks any backing by gold or silver. When we look at the US dollar and at what supports the US dollar, since 1971 the US dollar has declined 98% since President Nixon removed the dollar from the gold standard. Now with huge debt and nothing to back the US dollar, it is a serious problem in my estimation in relation to how the US can maintain the US dollar as the worlds reserve currency in the face of such debt and, when it comes down to it, a dollar that is based on nothing more than faith in the strength of the US government.

Silver: The Worlds Most Undervalued Asset

As I look at the potential consequences that we could see if we see a major shift away from the US dollar as the worlds reserve currency, the precious metals become more attractive, particularly when you look at the risk/reward ratio. Silver, in my opinion, is one of the most undervalued assets in the world. I think the profit potential that is on offer right now for silver is at historic levels.

The WeeklyVC PMI S&D Levels for Gold

Courtesy:EMA2Trade Live Signals

For the coming week, theVC PMI shows that the gold market closed Friday at $1324. One of the filters that we use is the 9-day moving average, which as we come into next week, is at $1334. With the market closing below the 9-day moving average, the weekly trend momentum coming into next week is bearish. The algorithm also tells us that if the price closes above $1334, it would negate this bearish sentiment to neutral. For self-directed individuals, you can use this level as one of your pivot points. If you short the market, use this level as a protective stop to return to a neutral position or wait state using the VC PMI methodology.

The second indicator we use is theVC PMI s average price or equilibrium price level for the coming week. The market closing at $1324, below that average, indicates that we are coming into next week with a bearish price momentum. The VC PMI also tells us that if the market closes above $1326, it would negate this bearishness to neutral, and a second close above $1326 will trigger the higher end of the extreme above the mean sell 1 (S1) level of $1335 and sell 2 level of $1347 at which point it is recommended to take profits if you are long and go back to neutral. Since we closed below the mean or average price of $1326, it has activated coming into next week the buy 1 (B1) level of $1314 and the buy 2 (B2) level of $1304.

If the price of gold reaches the B1 price, the market will revert back to the mean of $1326 90% of the time. If the market reaches the B2 level, if activated, there is a 95% chance that the market will revert back to $1326. A second close above $1326 would activate the extreme above the mean. What we see here is the reversion to the mean concept with a very specific structure that provides you with specific prices to trade the implied volatility of any market accurately; in this case, our subject was the gold market.

Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts. It is for educational purposes only.



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About the author


After more than 30 years in the financial market business, Patrick MontesDeOca has developed a unique and automated trading tool based on a combination of Elliott Wave, Fibonacci, WD Gann and Vedic Mathematics. This proprietary trading tool, the VC Price Momentum Indicator, is a revolutionary trading tool that identifies major cyclical changes and trading opportunities in the commodities and financial markets with unprecedented accuracy.


Learn how the fully automated VC PMI works, see its trading record, and begin to delve into the way professional traders trade. MontesDeOca, has spent more than three decades trading all types of markets, beginning in 1974 as a legal, banking and trading advisor for several major Latin American coffee exporters. During the 1980s he became a member of the New York Coffee and Sugar Exchange, and the New York Mercantile. He also served as a consultant and technical analyst for the Mexican government. He created the MCTS Markets Commentary, an advanced automated and technically oriented market letter for the financial and commodity markets published daily in Consensus Magazine since 2003. He is a widely published author, technical analyst and commentator in SeekingAlpha.com,  INVESTING.COM, and TraderPlanet.com.The complex multifaceted system is now completely automated and is available from TradeStation Technologies app store.

 
 
contributing author since 12/18/2017 

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