Member Letter an expectation to see the U.S. Dollar Index set a major cyclical peak this month. In expressing this view, I seem to be a lone voice of dissent. Many analysts whose opinions I highly respect, including Gary Savage over at SMT, a Member of The DOCument who writes a keen analysis of market volume, and even Jim Rogers"> Member Letter an expectation to see the U.S. Dollar Index set a major cyclical peak this month. In expressing this view, I seem to be a lone voice of dissent. Many analysts whose opinions I highly respect, including Gary Savage over at SMT, a Member of The DOCument who writes a keen analysis of market volume, and even Jim Rogers" />

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January 10, 2012

Lone Wolf

Over the past several weeks, I have frequently discussed within the Member Letter an expectation to see the U.S. Dollar Index set a major cyclical peak this month. In expressing this view, I seem to be a lone voice of dissent. Many analysts whose opinions I highly respect, including Gary Savage over at SMT, a Member of The DOCument who writes a keen analysis of market volume, and even Jim Rogers himself, all believe for various reasons that the dollar is on track for further appreciation. At the core of each of these bullish expressions is the belief that Europe's slow-motion catastrophe will keep pressure on the euro.

To this core argument I respond that the world's major central banks are all engaged in a currency war... a competitive devaluation under the false pretense that exports are the main driver of economic growth. I have very little doubt in the Federal Reserve's ability to "win" this war. In fact, the continued growth in M2 money supply in what should naturally be a deflationary environment has me convinced the Fed never stopped printing after the presumed end of QE2.

M2 money supply growth

Furthermore, major cyclical lows were due for gold and the general commodity complex in December.

commodity cycles

The CRB tends to print a major low roughly every 2.5 years, concluding with a 5-7 month decline into that low. In other words, confirmation of a new cycle implies roughly 2 years of generally higher commodity prices ahead as the new cycle ascends into a peak. I seriously doubt this new cycle could form without a dollar on the cusp of rolling over.

Public sentiment under the dollar also strongly suggests a peak is imminent. As you can see in this chart from Sentimentrader.com, every time public opinion exceeds 70%, the dollar forms a significant peak:

dollar index sentiment

The dollar also has a tendency to peak as the DX runs into overhead resistance.

daily dollar index chart

I believe there is a very strong chance that yesterday's reversal will mark not just a short-term peak, but also the peak of the dollar's 3-year cycle. If so, commodities are set to explode higher. As discussed in my 2012 Outlook, precious metals should also benefit nicely from a plunging dollar, though metals need more time to digest last year's tremendous moves before their rallies accelerate again.

 

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