Author Archives: Blake Morrow

Is the USD rally over?

You have probably heard most of the fundamental arguments by now about why you should own US Dollars. The FOMC is within months to raise rates for the first time in years, yet most other central banks are either lowering rates, imposing negative deposit rates, or perhaps unleashing their own versions of quantitative easing. Perhaps you have heard that monies are coming back to the USD because the US economy is faring much better than the rest of the world. Perhaps you have heard that the Chinese, Indian and other emerging market economies growth surges of the last couple decades have started to slow. The argument points are valid. Frankly, I agree with them. The questions that many are asking is “Has the US Dollar rallied too far, too fast? Is all the good news priced in? Is the USD rally over?”

When asked these questions I have to look at the pair technically, and see if there is any historical evidence that the USD (or better known as the DXY) is ready to reverse?

Months ago we looked at the DXY as it tested a 29 year trend line, and since then it recently stopped at its 50% Fibonacci retracement. This is important since we have seen it also stopped at a 50% retracement level back in 2001 from the 1985 highs to 1992 lows.

Over the last week, it has been brought to my attention that the USD index was (again) hitting the 29 year trend line. I was perplexed at the time, but realized that chart that those people were referencing were logarithmic style price charts on the DXY. Normally, that makes sense when looking at a longer term history of a security (let’s say like MSFT, the DOW, or maybe the NASDAQ) that has been through many splits or massive percentage gains over the years. The USD index which has not seen multipliers of gains or losses over the years is best viewed from a linear (arithmetic) price chart. That is a personal preference but here is the logarithmic chart traders are looking at:

2-18-15DXYLog

(log chart showing we are touching 29 year trend line, also testing the 50% Fibonacci level)

Here is the linear chart I have been looking at:

2-18-15DXYMonth

(linear chart showing we broke the 29 year trend line in November 2014)

Regardless of which chart you prefer to use, I think we could all agree on the fact that the USD is at a major inflection point. So the next question we have to ask is if the USD index will continue to rally or not. Looking at the daily chart I was able to find some answers.

2-18-15DXYDaily

(continuation patterns on the daily chart as RSI is back to mid point)

The last 3 legs higher (see below) have been met with an overbought Relative Strength Index (RSI) reading of above 70. When that happens, the DXY tends to consolidate as the overbought readings subside and the RSI comes back towards the midpoint (as it is now). At that point, the USD seems to make another push higher.

If the USD makes another push higher, it may be a big one. I suspect many in the trading community may be trying to fade a USD move since the consensus is that the USD long position has become overly crowded. On a breakout, that may just add fuel to the fire to the current USD rally. If the USD does push into new highs, we may breach that 50% retracement (just below 96.00) and push towards the 61.8% (or golden fib level) which is past 101.00 on the US Dollar index.

Sentiment change can be a huge shift in the market. The 29 year trend line has been broken. That’s longer than most of you have been participating in the markets, including me!

 

Blake Morrow

Chief Currency Strategist, Wizetrade

@pipczar

 

Disclaimer: I am currently long some USD’s against the AUD, NZD and CAD. I am currently seeking to add to my long USD exposure in the coming week(s)

Is Deflation Bad?

Personally, I don’t have the answer to that question. I like to say it is “beyond my pay grade.” However, if you read articles like this, it doesn’t seem so bad. But then again, if you read an article like this, or a speech like this, you may be a little worried if it knocking on our doorstep. Why would we be worried? Today, I read this Bloomberg article on “Draghi Commits to Trillion-Euro QE in Deflation Fight.” And, I know that following central bankers for the better part of 20 years, there is one word they will be wary of using. Yes, the D-word. If you search most “FOMC word clouds” you will notice in recent years “inflation” was used quite a bit. But as you know, especially in the Bernanke era, inflation was used a lot as “lack of inflation” rather than any other way. Looking back, it was obvious, and for years was my reasoning for falling gold prices.

So, back to the original question: Is deflation bad? My experience with deflation is minimal, but my lack of knowledge also provoked me to tweet a chart of the Nikkei, Japan’s stock market. Here is the chart and tweet:

1-22-15Nikkei

Many refer to the period of 1991-2001 as the “lost decade.” That was the period that Japan realized they were in a deflationary spiral and stocks market bubble popped (obviously) and they fell precipitously from there. Let me stop you now…you can go ahead and comment that I am drawing parallels between us, them, the world then and now. But I am not. Different country, different demographics, different political and immigration issues, etc. What I am showing you is how Japan’s stock market performed during the time of their deflationary period. I recall it well. In 1991, I was stationed in Guam. I was a Marine, guarding nuclear weapons post Iraq invasion. I recall all the Japanese who built massive hotels in Tumon Bay, Guam. And the building (at that time) slowly came to a halt. I noticed less Japanese visiting. What I didn’t know at the time was that Japan was entering the “lost decade.”

MarineBarracksGuam

Marine Barracks, Guam. Circa 1991 (my picture, and base closed 1992)

I understand why some would say deflation is “not that bad.” But, I also understand the mentality of a consumer in a deflationary environment I also understand I live in a consumer driven society (in the USA). I also understand that Ben Bernanke understood the risks of deflation since he knew that Japan could not turn the tide. It’s a mental state of an economy more than anything, and one that is not easily reversed (ask Japan).

I live in this world, just like you. I have kids that will be in college 10 years from now, and frankly, I can’t afford a lost decade and a 70-80% haircut in equities, can you?

I sure as hell hope Mario Draghi, Janet Yellen and everyone else enjoying Davos (at the WEF) this year can help the world avoid it.

 

Blake Morrow

Chief Currency Strategist, Wizetrade

@pipczar on Twitter

I hate buying gold

I am not sure if it is the fact that I see no reason to actually own a metal that serves really no purpose other than looking good around Mr. T’s neck. Or, the fact that if I own gold I know I am probably on the same side of the trade as Peter Schiff. Whatever the reason, over the last 20 years I have had a difficult time wrapping my head around the idea. I know, I know….as an investor there is a right time and place to put some gold in your portfolio, and in an inflationary period I could see the case. But, as you know, that is not the case, hasn’t been the case, and probably won’t be the case for the foreseeable future.

But one can’t deny that despite the massive rally in the USD over the last few months, that gold should have continued its decline. See chart below:

1-8-15DXYGC

In addition to the fact that gold stopped falling, it is testing a downtrend line that has been in existence for the last couple years. Read my tweet yesterday here (quite a few comments on this chart).

And if you read here, you would know that the USD over the last couple days has rejected a key level of resistance. So, the question I am asking myself is “if the USD is to decline, pullback, or consolidate in the near term, will gold rally? And if it does, is it for any other reason that a squeeze or poor short positioning?”

If Gold decides to stage a rally from here, I am not sure I can get myself to actually buy it. However, I would like to participate “somehow” and a trader (JessieMacguire) today reminded me of a conversation we had yesterday on my daily webinar about Gold and the JPY. Take a look at the following “strong” correlation between the JPY (6J) and Gold:

1-9-156JGC

Looking at this chart, one would think if gold rallies, the JPY should rally. The 6J is the JPY futures contract, that chart is the “candlestick” chart.

I can argue that this is a tough trade. You would be fighting the BOJ, Mark Cuban, Kyle Bass and every other asset manager from here to Timbuctoo. But for me, that boat (long JPY) could be a little lopsided as well. With a whiff of risk aversion or volatility due to the possibility of the FOMC raising rates sometime this year, perhaps that is the trade I go with.

Go ahead, leave your comments on “why” we all should own gold. You won’t be able to convince me. But that’s okay, I have the JPY!

 

Blake Morrow

Chief Currency Strategist, Wizetrade

Twitter @pipczar

 

Disclaimer: I have been long some JPY against the AUD, NZD and CHF for the last couple weeks. I am looking to add to my JPY exposure in the future.

Copper Breakdown Suggests a Lower AUD/USD Rate

One of the stronger correlations (over time) between currencies and commodities is the strong Australia Dollar and Copper correlation:

11-28-14AUDHG

 

Today, copper made a significant surge lower breaking key technical support at 2.88. At minimum, copper looks set to test the 2.50 (Fibo) support:

11-28-14HGweekly

 

If you take a good look at the AUD/USD weekly chart, it looks set to test below .8000:

11-28-14AUDWeekly

 

For the last couple years I have been looking forward to getting on the long side of the AUD/USD below .8000, and it looks like this time it could actually happen. However, one has to wonder….If the Dr. (Copper) has a PHD in economics, what is this current move suggesting? Some would think that the good doctor has either failed a few classes on the way to getting the PHD or royally screwed up his/her dissertation. But with China continuing sluggish growth (relatively speaking) and global deflationary pressures mounting, perhaps we should pay a little closer attention to what the doctor is telling us.

 

Blake Morrow

Chief Currency Strategist, Wizetrade

Follow me on Twitter @pipczar

 

Disclaimer: I am short the AUD/USD from 2+ weeks ago.

 

 

SPX Equal Point Move

SPX8-26-14

The S&P currently has rallied nearly the same point difference from the lows after the “1987 crash” @216.46, to the highs created in March 2000 @1552.87.

If you take the lows created March 2009 @666.79 known as the infamous “Haines Bottom” (after the late Mark Haines CNBC anchor), to create an equal leg we should get to “2003.20″ in the SPX.

“Elliotitians” would call that an “ABCD pattern.”

Today’s highs (at writing) is at 2002.33.

Blake Morrow

Chief Currency Strategist, Wizetrade

AUD/NZD showdown set for tomorrow, “High Noon”

Well, it will be “High Noon” somewhere tomorrow, right?

The AUD/NZD is technically in breakout territory, but tomorrow is going to be a big day for the pair. Tomorrow afternoon we have the RBNZ rate decision, and a couple hours after we have the Australia employment numbers for May.

Keeping in mind, technically the pair is pointed to a move of 1.1300 (from the double bottom, retest of neckline) in the coming weeks, the combination of tomorrow’s news could set the pair off in that direction. (see chart below)

6-10-14AUDNZD

The RBNZ is expected to raise rates another .25% tomorrow 3.25%. This would be the 3rd hike in 3 meetings. The market has priced in a total of 8 hikes in the next 2 years to 4.5%. There is some skepticism that the market may have overpriced two more hikes in 2014. In the event the RBNZ leads the market to believe that they may not be as hawkish into year-end (especially with housing moderating recently) the NZD currency is at risk for a continued pullback.

Turning attention to the Australia jobs numbers a couple hours later, it must be noted that the last three employment numbers Australia has beat the expectations. I don’t see this time as any different as full time employment also seems to be swinging higher too. Labor force participation rate is ticking lower which may be a concern.

In the event that the RBNZ tones down future rate hike expectations and Australia comes in with a stronger employment picture, it could send the AUD/NZD higher and continue this massive short squeeze that had started earlier this year.

 

Blake Morrow @pipczar

Chief Currency Strategist, Wizetrade

Disclaimer: I have been long the AUD/NZD since below 1.0900 and maintain my position.

USD Index “Long Wicks”

One of the best technical indicators for me is when I am looking at a Japanese candlestick on a daily or weekly trend, and see a “long wick” as we near a close or an interval. The reason why this is so powerful is because that means that traders were caught  a little wrong footed early on, and may have got “caught on the wrong side” and are forced to trade the other direction to cover shorts or liquidate longs. Hence a reversal takes place.

In the case of the USD, the market has definitely been bearish. No signs of letting up…until yesterday’s ECB meeting. This meeting has changed the outlook near term of the EUR and the ECB future policy actions, hence the USD index (which is comprised of about 57% of the index) may be influenced as well. Some pundits will say “the ECB has yet to act” but the market seems to care less since it seems to be caught a little “wrong footed.”

Whether or not the USD can capitalize or not on this recent squeeze or not, will be dependent on central bank activity in the coming weeks. However, 2014 has been the year of the hibernating bull for the USD. Don’t look now, but I think the bull just growled at you!

USD Index Daily chart:

5-9-14DXYDaily

USD Index Weekly chart:

5-9-14DXYWeek

DJ FXCM USD index Weekly chart (for a little more balanced USD view):

5-9-14USDWeek

Blake Morrow

Chief Currency Strategist, Wizetrade

 

Disclaimer: I started buying USD selectively against European currencies post ECB meeting yesterday

Trading a Divergence in Correlation – JPY and SPX

As you all know, for so many years the JPY has been highly regarded as a “carry trade” instrument. But post financial crisis, that trade did not make much sense anymore since the interest rate differetials were so much smaller that they were pre financial crisis. Now with many major central banks at or near ZIRP, even some of the “best carry traders” like the NZD/JPY carry a 3% interest. For an institution, that trade is probably not work the risk (volatility). However, that trade (carry) exists in most traders minds (for whatever reason). I had a special guest Mark Dow on my webinar a few weeks ago as we discussed why this is. And frankly, in his view, he has seen this example of this “Pavlov’s Dog” behavior in many trades years after they realistically have not existed. However, that should be a topic of another blog somewhere down the road.

Getting back on point, over recent years the USD/JPY and SPX have enjoyed a very “parallel” relationship. I have argued many times the last leg of this market rally in 2013 was a combined effort by the Federal Reserve AND the Bank of Japan when they indeed launched their massive QE efforts.

4-25-14SPXJPY

Present day, one of the reason why months ago I shorted the USD/JPY and went long JPY is there was a major divergence in the JPY and SPX. See article here in the FX Cafe.

Today, very similar setup. The SPX rallied back (retraced) about 80% of its sell off from 2 weeks ago. The USD/JPY? 50%. That “divergence” tells me that when the market would move down (like the SPX is today) the risk of a breakdown (larger) could be in store for the USD/JPY. So, it should be no mystery why the USD/JPY is testing 102.00 currently.

4-25-14SPXJPY1

Frankly, if the USD/JPY breaks the 101.00 major support in the coming days, stock market bulls may want to get defensive.

Blake Morrow

Chief Currency Strategist, Wizetrade

Disclaimer: I have been long JPY against most majors for last several weeks and also short equities via ETF’s

Nikkei Futures and USD/JPY on Major Support

From a risk/reward perspective, if you want to be long the USD/JPY or Nikkei futures, this is the time to do it.

However, considering the risks fundamentally (loss of faith of Abenomics, massive JPY short positions, Japan starting its nuclear power programs again, etc) and the risk of the JPY carry unwind (which, as many know I am not a believer of this story but the market still trades on it like the AUD has an 800bps advantage over the JPY still…lol) should risk aversion pick up, you may think otherwise.

I want to turn your attention to the massive supports both sit on:

4-10-14NikkeiJPY

 

The USD/JPY is sitting on the massive 101.00-101.50 support

The Nikkei massive support is at 14,000.

If you are like me, and trade correlations, then you also know the JPY (6J) and SPX have a very strong inverse correlation:

4-10-146JSPX

 

And here is the 10 Year and JPY (6J):

4-10-14ZN6J

 

Lastly, here is the USD/JPY (candle) matched up with the E-mini’s, Nikkei and Bonds:

4-10-14ESJPYNikkeiZN

 

Correlations in markets are a lot like dominoes. One falls, it tends to knock down the other, then the other…

Playing long risk is fine for now, but the USD/JPY or Nikkei are so close to support, if they break down, you better “watch your 6!”

 

Blake Morrow

Chief Currency Strategist, Wizetrade

Disclaimer, I am long the JPY against most major currencies and have been for weeks.

Observation on the USD and Fed Funds Rates

Last week, I was having a conversation with one of my friends, @Vulgi about a research piece that was written by Nordea bank. The research showed how historically the USD would not rally just as the Fed would raise rates. I took it upon myself to look and see if that was the case or not.

As you can see in this chart, since 1970 this is the EFFR (Effective Fed Funds Rate) and the USD overlayed:

4-8-14EFFRUSD

 

The vertical lines are  when we started a rate hike cycle (Red) and  when the USD rally followed (Green). What I noticed is that the USD (in most instances) rallied quite some time after the Fed actually hiked rates.

The “Taper is not tightening” TV expert monologue may actually be quite true in today’s market. And frankly, even when the Fed (sometime in 2015) decides to hike rates, it may also be true that the USD may not rally immediately following any monetary policy tightening from the FOMC.

One function of the USD that is true at the moment, and has been for quite some time, is that the USD is the reserve currency of choice. Which means, during prolonged periods of risk aversion the USD tends to be the beneficiary.

4-8-14EffectiveFedFundsRateUSDSPX

 

The USD does have a unique role as the reserve currency of choice for most (for now until there is a better alternative). What you will notice about the chart above, when the stock market moves lower, the USD is usually already in demand, especially in 2000 and 2008. If the Stock market does turn lower in the next couple of months, the USD could benefit from risk aversion flows, and if the FOMC is still hell bent on raising rates at that point, the USD rally could continue.

So, before you get too comfortable with shorting the USD, do take note we are in the “apex” of a long term wedge which make it increasingly difficult to trade.

4-8-14DXY

 

Also, keep in mind the SPX may be at the upper end, or top, of an up sloping channel of the last 5 years.

4-8-14ES

 

One last thought. Steve “Sully” S also said “this ain’t your Daddy’s FOMC” which is very true. This isn’t your Daddy’s market or monetary policy he has ever seen.

 

 

Blake Morrow

Chief Currency Strategist, Wizetrade

Disclaimer: I am pretty sure within the next 72 hours I will buy and sell the USD in some way shape or form.