April 27, 2019 | Trading Desk Notes – April 27th

The US Dollar surged higher against virtually all other currencies this week with the US Dollar Index (USDX) hitting its best level since May 2017. Last week I wrote that the USDX was setting up to surge through the upper boundary (around 98) of a bullish rising wedge pattern and could make a run at the 14 year highs around 103 made at the end of 2016. I noted that volatility in the FX markets was around 5 year lows and that over the past couple of decades ultra-low volatility was often followed by explosive moves.

Last week I also noted that US Dollar bears could argue that being long the USD was a very crowded trade…and indeed bullish USD Sentiment hit extreme highs this week…and I think part of the USD surge higher on Wednesday and Thursday came from bears “throwing in the towel” and covering their short positions.

I started this week short CAD and gold against the USD and took profits on both positions Thursday. This doesn’t mean I think the USD rally is over…I just think it “burst the dam” and there will be some “chop” while it adjusts to its new status. So I’ll watch from the sidelines…looking for an opportunity to buy the USD.

The Canadian Dollar has been trending lower the past 3 months as the USD was trending higher…despite the strong gains in the oil market and the stock market (the TSE index made new All Time Highs again this week.) CAD broke down sharply Wednesday following a dovish BoC, but had no follow through on Thursday so I took profits on my short. I’ll be looking for an opportunity to get short CAD again (as well as other currencies.)

Gold has been trending lower the past 3 months (down ~$80 from its February highs) as the USD was trending higher…despite the big drop in real interest rates…which is often bullish for gold. A bearish Head and Shoulders pattern has developed on the gold chart since January with a downside target of ~$1225 once the $1290 (basis Comex June) neckline was broken (see my recent blogs for more on the gold H+S pattern.) I was short gold as a play on USD strength but I also saw gold being “ignored” as the stock market made new highs day after day. Gold may also have also been flashing an “early warning” of coming USD strength. Gold made its low for the week on Tuesday and was actually steady to better Wednesday/Thursday as the USD surged higher…reason enough for me to cover my short position and stand aside.

If the gold H+S pattern continues to play out I’ll be watching for the gold rally off this week’s lows to test the neckline. If it then reverses lower I’ll look to get short again…especially if the USD is rallying at the same time.

The crude oil market surged to new multi-month highs Monday morning on press reports that Trump would not extend the existing waivers to 8 countries to continue importing Iranian crude oil as the White House  attempts to drive Iranian exports to zero. (These waivers have been in place for a few months and have effectively allowed Iran to export ~1 MBD.)  WTI traded above $66 mid-week but fell like a stone Friday on press reports that Trump had been “on the phone” with OPEC and “gasoline prices are coming down.”

WTI prices closed higher in 9 of the last 10 weeks (rising from ~$51 to ~$65) but this week’s price action looks like a dramatic Weekly Key Reversal Down…trading above last week’s highs and closing below the lows of the last 2 weeks. With all due respect to Trump’s power to move the market WTI and gasoline had already started to fall back from their over-stretched highs before the news “leaked” out. My long-time friends Ross Clark (technical view) and Joseph Schachter (fundamental view) both see much lower prices over the next couple of months…followed by new highs later this year.

The US Treasury market…from T-Bills to long bonds…has rallied the past 2 weeks…perhaps in anticipation of slowing global economic growth as one central bank after another announces that they are scaling back their growth projections and will more likely be cutting interest rates rather than raising them. I bought T-Notes 2 weeks ago thinking that their setback from late March highs was a buying opportunity. I still hold that position and I think owning Treasuries also gives me an “easier” way to position for a possible shift away from the aggressive “risk on” mood that currently drives the stock market.

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Victor Adair April 27th, 2019

Posted In: Victor Adair Blog

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