by Market Anthropology
We continue to find ourselves walking in a strange parallel universe exploring the flip side of the long dollar / short euro thesis and wondering if a material pivot lower in the dollar is upon us. Could it just be nerves before a major breakout in the dollar materializes? Perhaps. We have watched these forces come together for some time - butterflies at the altar would be nothing new with these prospective nuptials. And while it has been quite good for us to have a strong read on the dollar and the euro's next move and see the kinetic potential throughout the commodity and currency markets - we recognize cracks forming in the relative strength of the dollar and conversely pressure building within the euro. We also have watched (actually foresaw) as corners of the commodity market - such as the gold miners relative to gold itself - have made an important turn higher this week.
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Further buttressing the case against the dollar - and as we have noted over the past few weeks - silver appeared coiled with underlying upside momentum. In perhaps a first since its large pivot lower in May 2011, the euro's relative strength to silver may be result of a correlation divergence. The conviction of the jury is still out, but if we played devil's advocate to the asset relationship - that's how we would see it.
The US dollar index comparative that we have utilized quite closely has provided an excellent road map of the dollar's potential and pivots - and a contrasting backdrop to the last time the index broke aggressively higher in 1997. What we have recently seen and pointed out is a notable divergence in the relative strength of the index as it consolidated and broke higher over the past several weeks. In terms of expectations of performance of trend - it's come up short.
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You will often find with useful comparative wave or cycle analysis the assets acutely correlate coming through a major pivot structure and volatility event - then closely trend coming out, before eventually diverging as either the analog or current market walks outside of what would be characterized as normal distribution. I have compared it in the past to lobbing a rock into a pond, whereas, the geometry of the disturbed surface will replicate with great congruency at the point of entry and dissipate as you move further away from the epicenter of disturbance. Granted, when the comparison is of the same asset you may also encounter and provide similar kinetic intermarket turbulences at the respective pivots. What we may be witnessing with the dollar - and as I pointed to last week is the trend stalling out and another trip lower through the range.
"With only a few sessions remaining in May - the US dollar index is marginally holding above it monthly breakout ~ 83.50. As we see it, the risk here for dollar bulls and precious metals bears (both of which we have helped chair the Departments since April of 2011) - is the dollar becomes exhausted and similar to 1994 takes another trip lower through the range. All things considered - we still like the dollar, but remain vigilant and open to an audible lower for a spell." Between Mosquitos & Cicadas
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Just as the dollar showed significant positive "pressures" in early February (as expressed in the relative strength of the move), the euro is now potentially sitting on similar forces.
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What's also interesting here and potentially worthy of extrapolating a bit of past drama - is similar to the failed breakout drive by the dollar in 1994 - the Treasury market soon followed lower with prejudice when the Fed began raising interest rates. Today, the catalyst for the Treasury market blaze appears to be arson as well; motivated by a Fed perhaps uneasy at the pace and character of risk appetites and boxed in by greater transparency and somewhat conflicting data. I suppose the strange silver lining is a little inflation caused by a slouching dollar here wouldn't exactly be the worst thing in the Fed's eyes as inflation data continues to surprise to the downside.
Strange bedfellows indeed - although par for this marriage.
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