Category: US Dollar Index

The US Dollar Index $DXY_us.

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Dollar breaks out, Gold tests support

The 5-year breakeven rate for inflation — calculated by deducting the yield on 5-year TIPS from the 5-Year Treasury yield — rallied in recent weeks and is testing resistance at 1.60%. But the long-term trend is down and we should expect another test of support at 1.2%.

5-Year Treasury Yield minus 5-Year TIPS yield

Apart from Japan, deflationary pressures are rising in all major OECD countries. Given the global trend, the Fed is likely to raise interest rates at a leisurely pace. Expect low inflation and low interest rates for the next 2 to 3 years.

10-Year Treasury yields rallied along with the inflation breakeven and are now testing resistance at 2.15%. Breakout would test the descending trendline around 2.40%. But reversal below 2.0% remains as likely and would signal another test of 1.65%.

10-Year Treasury Yields

The Dollar

The Dollar Index broke through resistance at 95.50, offering a medium-term target of 100*.

Dollar Index

* Target calculation: 90 + ( 90 – 80 ) = 100

Gold

Low inflation undermines support for gold. Spot Gold is testing long-term support at $1200/ounce. Reversal of 13-week Twiggs Momentum below zero warns of another decline. Breach of support at $1200 would signal another decline, while follow-through below $1150 would confirm.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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Gold and the impact of Beijing on Fed monetary policy

The prospect of higher interest rates is fast approaching, but 10-Year Treasury yields retreated below 2.0%, warning of another test of the December low at 1.40%.

10-Year Treasury Yields

The weight of foreign purchases, for reasons other than yield (dollar peg/currency manipulation), may be overwhelming the market response. This has happened before, in 2004/2005, when the Fed was alarmed to find that long-term yields failed to respond to monetary tightening. The graphs below are from a 2012 report by DO Beltran (and others) at the Fed. The Fed Funds Rate was steadily increased between mid-2004 and the end of 2005, but 10-year yields declined slightly over the same period.

Fed Funds Rate and 10-Year Treasury Yields

The reason was fairly obvious: a massive surge in foreign purchases (mainly from China) had left the long-term market awash with liquidity. US monetary policy was effectively being controlled from Beijing.

Foreign Treasury Purchases

I cannot understand why this abuse has been tolerated.

The Dollar

The Dollar Index has been consolidating for the last 5 weeks, but the narrow range is a bullish sign and the Dollar is likely to strengthen further. Breakout would offer a medium-term target of 100*.

Dollar Index

* Target calculation: 90 + ( 90 – 80 ) = 100

Gold

Spot Gold is testing support at $1200/ounce. Reversal of 13-week Twiggs Momentum below zero warns of another decline. A trough below the zero line would strengthen the bear signal.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

The strong Dollar, low inflation and higher interest rates all point to another decline, but so far support has held firm. Completion of another trough at this level would strengthen the argument that gold is forming a long-term bottom. Possibly with help from Beijing.

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Gold and the bull-trend in bonds

10-Year Treasury Yields found support above the December low of 1.40%, recovering above medium-term resistance at 2.00%. The outlook is hardening around a Fed increase in short-term rates by mid-year. A higher trough would suggest that the long-term down-trend in yields, shown below on an annual chart, is coming to a close. But only breakout above resistance at 3.00% would confirm that the secular bull-trend in bonds has ended.

10-Year Treasury Yields

The Dollar is strengthening on the back of low inflation and expectations of higher rates — bearish signs for gold.

Dollar Index

Spot Gold remains in a bear trend, testing support at $1200/ounce.

Spot Gold

Reversal of 13-week Twiggs Momentum below zero warns of another decline. A weekly close below $1180 would strengthen the bear signal.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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Gold resurgent despite stronger Dollar

The Fed has signaled a “patient approach” to raising interest rates, causing long-term yields to fall. Ten-year Treasury Note yields broke primary support at 2.00%, signaling another test of the 2012 low at 1.40%. Declining 13-week Twiggs Momentum below zero confirms continuation of the down-trend. Recovery above 2.00% is unlikely, but would warn that the down-trend of the last 12 months is ending.

10-Year Treasury Yields

The Dollar Index is headed for a test of long-term resistance at 100. Rising 13-week Twiggs Momentum signals a strong (primary) up-trend. Retracement to test support at 90 remains a possibility, but the likelihood of reversal below this level is remote.

Dollar Index

* Target calculation: 90 + ( 90 – 80 ) = 100

Gold

Despite the rising Dollar, Gold continues to test resistance at $1300/ounce. Breakout would signal a rally to $1400/ounce, but trend reversal is unlikely. Retreat below $1200 would confirm a long-term target of $1000*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

The Gold Bugs Index, representing un-hedged gold stocks, displays a similar picture. Breakout above 200 would signal a rally to test the declining trendline around 250, but reversal of the primary down-trend is unlikely.

Gold Bugs Index

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Gold is rising despite a strong Dollar

Gold is strengthening despite falling oil prices and the rising Dollar.

The Dollar Index is advancing toward a long-term target of 100 after breaking resistance at 90 in December.
Dollar Index

* Target calculation: 90 + ( 90 – 80 ) = 100

Spot gold is testing resistance at $1300/ounce after breaking through $1250. Expect a rally to test resistance at $1400, but a change in the primary trend is unlikely. Reversal below $1200 would warn of a decline to $1000*.
Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

The most likely explanation for gold strength is the prospect of significant quantitative easing by the European Central Bank. Mario Draghi has called on the ECB to purchase € 50 billion of securities per month until December 2016 according to Bloomberg. With Japan and China already following the path of monetary expansion, concerns over the potential for a “currency war” are growing.

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Dollar rises as yields fall

Flight to safety is driving demand for the Dollar, with the Dollar Index breaking resistance at 90 to signal a long-term up-trend.

Dollar Index

Long-term Treasury yields are falling in response to a lower inflation outlook. But foreign Treasury purchases may also be a contributing factor, with China seeking to protect its advantage in export markets.

10-Year Treasury Yields

Expect strong support at 1.40 to 1.50 percent. Yields are unlikely to fall below that level unless there is a serious risk of deflation. Recovery above 3.0 percent appears some way off, but would warn that the 30-year secular bull market in bonds is coming to an end.

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Gold and Inflation

The Dollar Index is testing long-term highs at 90. Breakout is likely and would suggest a strong bull trend.

Dollar Index

One reason is falling inflation expectations, with the Breakeven Rate (5-year Treasury yield minus equivalent TIPS yield) testing its 5-year low. Further falls would increase pressure on the Fed to raise interest rates.

Breakeven Rate

A strong Dollar and low inflation both weaken gold prices. Declining 13-week Twiggs Momentum, below zero, suggests a strong down-trend. Follow-through below $1180/ounce would confirm this.

ASX 200 daily

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Stronger dollar, weaker gold

Ten-year Treasury Note yields retreated below 2.30%, signaling another test of primary support at 2.00%. Declining 13-week Twiggs Momentum below zero suggests a continuing down-trend. Recovery above 2.40% is unlikely, but would warn of a rally to 2.65%.

10-Year Treasury Yields

* Target calculation: 2.30 – ( 2.60 – 2.30 ) = 2.00

The Dollar Index is testing resistance at its 2008/2010 highs between 88 and 90. Rising 13-week Twiggs Momentum indicates a healthy (primary) up-trend. Expect retracement or consolidation below resistance, but failure of support at 84 is unlikely.

Dollar Index

* Target calculation: 84 + ( 84 – 79 ) = 89.00

Gold

Low inflation and a strong dollar reduce demand for gold. Low interest rates reduce the carrying cost of gold, but the appeal is muted when inflation expectations remain low. Gold is testing its new resistance level at $1200/ounce. Respect is likely and would confirm a long-term target of $1000*. Declining 13-week Twiggs Momentum below zero indicates a strong down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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Dollar rising, Treasury yields trend lower

The rally in ten-year Treasury Note yields continues. Expect resistance at 2.50% (the descending trendline). Respect would warn of another test of primary support at 2.00%. 13-Week Twiggs Momentum below zero continues to signal a primary down-trend.

10-Year Treasury Yields

* Target calculation: 2.30 – ( 2.60 – 2.30 ) = 2.00

A monthly chart of the Dollar Index places the current advance in its long-term context. Expect resistance at 88 to 90, with a possible correction to test support at 84. But the primary trend is up and breakout above 90 would offer a long-term target of 105. Rising 13-week Twiggs Momentum suggests a healthy (primary) up-trend. Failure of support at 84.50 is unlikely.

Dollar Index

* Target calculation: 84 + ( 84 – 79 ) = 89.00

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Dollar rising as Treasury yields recover

The yield on ten-year Treasury Notes recovered above the former support level at 2.30%, suggesting another test of 2.50% and the descending trendline. Reversal below 2.30%, however, would warn of another test of primary support at 2.00%. 13-Week Twiggs Momentum below zero continues to signal a primary down-trend.

10-Year Treasury Yields

* Target calculation: 2.30 – ( 2.60 – 2.30 ) = 2.00

The Dollar Index respected its new support level at 84.50 and recovery above 86.5 would confirm a primary advance to 89*. Rising 13-week Twiggs Momentum suggests a healthy (primary) up-trend. Failure of support at 84.50 is unlikely, but would warn of correction to the primary trendline.

Dollar Index

* Target calculation: 84 + ( 84 – 79 ) = 89.00

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