The U.S. dollar (UUP) is at 11-month highs. The dollar index is finally showing the strength many expected from the beginning of 2014 in anticipation of strong economic numbers and subsequent rate hikes.
The U.S. dollar surges….but is still well within its QE2/QE3 trading range
The chart above shows that the U.S. dollar index has been on a relative tear since bouncing off its QE3 reference price (the QE reference prices are where the dollar traded at the time the Fed announced QE). This move really accelerated on Tuesday and Wednesday of this week (August 18th and 19th) in the face of strong U.S. housing data. However, this recent history of such rapid moves in the U.S. dollar is not pretty. Especially with the dollar extending above its upper-Bollinger Band (BB), traders should expect a notable pullback.
In particular, Jackson Hole 2014 edition is coming up. This symposium is hosted by the Federal Reserve Bank of Kansas City. It will provide a forum for Federal Reserve Chair Janet Yellen to pedal softly and disappoint folks who are bidding the dollar up in anticipation of some kind of rate hawkish talk.
Now if I am wrong, and Janet Yellen delivers for the U.S. dollar, all bets are off. In such a case, I will be particularly interested in ramping up my bets against the Australian dollar with an emphasis on AUD/USD. Reserve Bank of Australia governor Glenn Stevens will likely be the happiest man in the crowd to see the Federal Reserve finally definitively steer toward a normalization of monetary policy.
The Australian dollar is undergoing a very extended topping process against the U.S. dollar
In any case, the dollar still looks good to trade between the rails of the QE2 and QE3 reference prices. Only a breakout (upside or downside) is a truly significant move at this point.
Finally, gold has finally buckled under the pressure of the rising U.S. dollar. As expected, SPDR Gold Shares (GLD) has now completely reversed the premature pop that was presumably in response to a media-driven fear that the Fed was somehow getting behind the curve on inflation.
GLD gaps down to complete a reversal of June’s premature “inflation scare”
Mind you, I remain bullish gold, but I remain sober in observing that there are simply no near-term catalysts to drive it higher on a sustainable rally. The best I am willing to believe is that 2013′s sell-off has ended in a sustainable bottom.
For your “edutainment”, I have included this short clip from CNBC’s Rick Santelli. I think he is a bit nuts, and the nuttiness seems to grow as the markets refuse year-after-year to bow down to his desires, wishes, and ideologies. But I LOVE this defense of technical analysis relative to trading the “fundamentals” of monetary policy. Quite relevant as Jackson Hole kicks off with the U.S. dollar over-extended in the near-term…
Be careful out there!
Full disclosure: net short the U.S. dollar, long GLD