EQUITY RUN UPDATE : $10,365
A friend asked me where I thought the US Dollar would be next year. I thought that it would a tough call, as any long-term call can be… But I gave it a shot. Here is a copy of message to him:
9/24/17, 21:57:56: 1.20 Eur/Usd has been a critical technical and psychological spot for the last 20 years. We are basically there now. Given the fast move there, a little pull back to 1.15-1.7 in the next month or two, going into the Fed Decem decision (yes to a rate hike) seems most plausible to me. However, after that it will be crunch time for Draghi. He’ll start his tightening process in 2018, very slowly, and that should push the Euro back above 1.20-1.25. The economic fundamentals are in favor of the euro over the next 6-12 months. Optimism is beginning to come back there and data show decent numbers even in Italy. This is the base case. Exogenous events such as another Greek tragedy could hamper this projection. I put that probability at 25%. North Korea as an event has actually been triggering negative reactions towards the dollar with safe haven sought in the euro and yen instead (this one baffles me a bit — but that’s been the short term reaction to each missile).
The DX is even more tilted to the negative because the pound is strengthening even faster than the euro. Metals and oil have also gotten stronger which make the Canadian and the Australian dollar stronger. Short term, given the recent rallies, I see the same pullback as mentioned above, but the the overall long term trend is down for the index (up for others). The unknown to me is the yen. They have been doing unconventional monetary stuff for a long time. I can’t tell what’s next for them.
Lastly, the one thing that struck me the most from last week is the “inflation is a mystery” statement which I interpret as a signal from the Fed to the market that they are willing to at least temporarily ignore its stagnancy and move forward with hikes. If they do that, you can expect Draghi to follow suite in 6-12 months. Inflation was the last “data” obstacle to raising rates.
He doesn’t agree…
We’ll check back in 12 months! 😉
As we head into the Fed week (meeting is in a week, 12/13/17), here is a potential setup.
“Interlocking head and shoulder continuation,” I believe is the technical set up.