The US Dollar Is Telling Us Something About Risk And Rates
1.) US DOLLAR – It’s always good to check in on one of the biggest, most important components of global macro…the US Dollar. And it continues to say the same thing it has over the last several weeks…no rate hike. The currency market is pretty smart. If a rate hike were “all but done,” I would think it would be reflected in the US Dollar Index (DXY) by rising, not falling. The shaded area that you see is what we call trend. That is a level that is derived by calculating the rate of change of price, volume, and volatility. It’s not just a simple, single-factor calculation. The bottom line is that level tends to reject or support price. You can see that it was rejected on Aug 13 and again on Sept 2 with a lower high. Those rejections are meaningful when it comes to thinking about rates, or the “cost of money.” If rates were going up, the cost of money would be going up to reflect that expectation. Moreover, there is no flight to safety. Maybe more than anything, the movement of the Dollar is a reflection of how investors are thinking about risk. Demand for US Dollars says “risk off.” If demand were significantly increasing, we’d expect to see that reflected in a rising Dollar Index. So, for now anyway, we see no rate hike and no flight to safety.
2.) SENTIMENT – I write about sentiment a fair amount. It allows us to take the market’s “temperature.” So where are we now in terms of optimism or pessimism? Well, the chart below highlights with a red dot those dates when the 20-week moving average of the American Association of Individual Investors (AAII) Bull Ratio indicator crossed above 48 for the first time in 6 months. The most recent signal occurred on September 2nd. You can see that when this has happened, the historical returns for the Nasdaq 100 Index were positive across all timeframes. Is this a guarantee history will repeat? No, of course not. Markets are never that easy. But it does tell us that euphoria is still nowhere in sight, which is a good thing!
3.) OIL – No rest for WTI, Brent, or Shanghai crude just yet, with these up again so far this morning. However, indicators continue to point toward a pullback or consolidation. Of course, momentum can last longer than many think. But is there a catalyst that could impact the price of oil? Sure. The summer driving season is essentially over, but perhaps more importantly, what is happening with the Iran situation and the Strait of Hormuz. Here is a picture of tanker flows through the Strait of Hormuz by vessel type from March 9th through the latest data point of August 23. The price of oil could definitely be negatively impacted by these tanker flows continuing to increase. Am I holding my breath for that? Nope. But given internal indicators, I would not be surprised to see some relief in the price of oil. Calculations suggest $89/barrel would not be surprising. WTI is currently trading at $96/barrel.
