What's next for the US Dollar Index and gold?
If Janet Yellen goes lovey-dovey at the June FOMC, real rates get more negative and gold could rise to $1,400.
Dubai - There are many possibilities that can happen to these measures
The US Dollar Index (DXY/Dixie to the forex cognoscenti) has fallen from 102 in February to 97 as I write, thanks to disappointment over recent US economic data momentum, the subsequent fall in the 10-year US Treasury note yield to 2.15 per cent and political angst on Trump's pro-growth legislative agenda amid the darkening shadows of Comeygate. In fact the US dollar's 1.5 per cent fall against the Japanese yen to 109.80 reflects the capital market consensus that the Yellen Fed will slow down its pace of interest rate hikes even as the FOMC meets in its June conclave this week.
The big miss on May non-farm payrolls, the soft services ISM and the credit woes in the used car market (the new subprime?) could well have an impact on Fed's statement even if the FOMC engineers another 25 basis point rate hike. After all, 138,000 new jobs does not add up to a three per cent GDP growth economy that Trump and his acolytes have trumpeted (sorry, awful pun!) as their policy target.
It is also significant that the headline CPI in May has slowed to 2.2, down from March's 2.4 per cent rise. So I must calibrate my Fed call. The June FOMC will see a rate hike but Dr Yellen will play down expectations for a September rate hike while she tracks the labour market, the high drama in Congress, PCE inflation, the death rattle of Trump's legislative agenda and geopolitical events in North Korea, Russia and the Arab world.
Dollar-yen was the ultimate Trumpkins trade for me as the yen tanked to 118.65 in the five weeks after the election as Wall Street hailed the false dawn of a billionaire property developer/snake oil salesman as the leader of the Free World. Yet Trump has been the biggest disaster in US Presidential history, with 34 per cent approval ratings that even Richard Nixon ("I am not a crook") would have scoffed at.
The 50-million angry, America First xenophobes in the US who voted for him in the November election were fooled into electing a president whose policies benefit the financial elite of Wall Street, not the working class stiffs, the proverbial Joe and Jane Sixpack Middle America. When the financial markets lost its confidence in Trumpkin's legislative prospects, the ten year US Treasury note yield fell from 2.5 per cent to 2.13 per cent (a bear steepening of the yield curve in Bondspeak) and the US Dollar Index fell to seven month lows. Comegate? The Volatility Index dropped below 10 while the fired FBI director testified to hostile senators.
As expected, Mario Draghi kept the ECB policy rate unchanged even if his statement was a tad less hawkish relative to consensus while Trump's latest assault on Dodd Frank slammed the euro. As a leak proved, the ECB has downgraded its inflation forecast, despite the clear acceleration in momentum in eurozone growth (on Planet Forex, we live in a world of second derivative deltas, theta curves and four dimensional chess!). Four-hour charts on the euro (forgive me, but I also do 100-year macro retrospectives on European history) tell me that the euro failed at its bearish 20 day moving average. This means the euro is now headed to 1.10 unless it recovers to 1.1240, where the "trend is my friend" neurological programming will force me to again go long euro for a May 2016 target of 1.16. Like Janet Yellen, I too am data dependent, though unlike her (sadly) I have no advance knowledge or insider edge on the data flow. I will spare my valued readers the Ichimoku cloud rhapsodies!
Gold's rise to $1,266 an ounce (note my silver trade idea as the white metal rose to $17.65 spot. So voila! S for Shanghai, L for London, V for Venice spells SLV!) is nothing more than a corollary of Dixie weakness and the horrific terrorist attacks in the Manchester Arena, London Bridge, Notre Dame, Baghdad and Kabul. Gold is also a cheap hedge against a political meltdown in the Trump White House and a potential policy U-turn by the Yellen Fed if wars and rumours of wars pan out. CFTC positioning data notes the smart money has dramatically increased its net longs in gold and silver futures. The world's largest gold bullion index fund, (the Fort Knox/King Midas of our times) has increased to 851 metric tonnes. Monsieur Auric, Lord Keynes' barbarous relic is in a bull market. If Aunty Janet goes lovey-dovey at the June FOMC, real rates get more negative and gold rises to $1,400!
The writer is a global equities strategist and fund manager. He can be contacted at email@example.com