The weakness in the Dow Industrial is not being echoed by the USD Index……or if it is then it is a very faint echo! This is rather different behaviour than that which occurred over the last 12 months where every time there was weakness in the Dow it was preceded with rather substantial strength in the USD Index.
So what do we trust…….the break down in the head and shoulders formation in the Dow or the lame performance of the USD Index? We believe that currency markets are far more powerful than equity markets so we are sticking to the evidence put forward by the currency market. We also believe that the front runner to currency markets is world bond markets.
The bond market’s action suggests the USD is about to break down again. The charts below are the relative performance graphs of ETFs that track developed market debt ex US (BWX) and emerging market debt (PCY) relative the US 10 year treasury. In both cases the up trends over the last 4-6 months are strong with little to suggest that the up trends are about to come to an end anytime soon. With the breakdown in the Dow we would have expected that these relative graphs to also have broken down by now ……but they haven’t. We don’t know what the future holds but we do know that underlying macro investment themes move in observable trends. In essence we track and trade these trends. Right now the trends below are up……..which paints a rather bearish picture for the USD Index
We would be using any strength in the USD Index to increase short positions……we are sure that by year end the USD Index will be trading at a multi-year low. We believe that there are more effective ways to get short exposure to the USD than simply buying the ETF UDN or shorting USD Index futures.
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Rather interesting. Has few times re-read for this purpose to remember. Thanks for interesting article. Waiting for trackback
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[...] the weakness in equity and commodity markets would be shallow. Note what we said on July 10th at thedailytradingreport.com. It now appears that the USD is about to challenge the 78.50 level which is its last line of [...]