US Dollar Index - DX

[CanOz]

What are peoples thoughts on this bullish flag?

Some nice volume on the intraday lows too.

Cheers,


CanOz

 

[Frank D]

USD Index

Chart below should explain my view on the USD Index...

 

[CanOz]

DX displaying some strength, with strength in equities...

 

[CanOz]

From the Bloomy...

Dollar Gains Show U.S. Leading Shift to Stocks: Chart of the Day
2013-03-15 04:00:00.6 GMT


By David Wilson
March 15 (Bloomberg) -- The dollar’s strength in the midst
of a more stable financial system signals the U.S. will lead a
worldwide shift toward stocks from bonds, according to Michael
Hartnett, Bank of America Corp.’s chief investment strategist.
The CHART OF THE DAY tracks the performance of the Dollar
Index, a gauge of the U.S. currency’s value against those of six
major trading partners, and a Bank of America index of global
financial stress. Hartnett used a similar chart in a report
yesterday.
This year’s moves in the indicators helped bring “a
decisive end” to a relationship between them that developed
before the 2008 financial crisis and pointed to deflation, the
New York-based strategist wrote. The Dollar Index has risen as
much as 3.9 percent, while the Bank of America index has shown
below-normal stress levels all year.
“The leadership of the U.S. in the Great Rotation remains
ongoing” because of the decoupling, the report said. Hartnett
was referring to a return to more normal economic growth and
interest rates, which prompts investors to add equities and
reduce debt holdings.
Stocks have room to advance, Hartnett wrote, in the absence
of surging interest rates or falling corporate profit margins. A
“sellers’ strike” by investors concerned about missing a rally
may help lift share prices, he added.
MSCI Inc.’s broadest stock-market gauge, the All-Country
World Index, gained 6.5 percent for the year through yesterday.
U.S. shares were even more rewarding, as the Standard & Poor’s
500 Index climbed 9.6 percent and approached a record set in
October 2007.

For Related News and Information:
BofA Global Financial Stress Index: GFSI <Index> DES <GO>
MSCI-S&P 500 comparison: MXWD <Index> COMP YTD SPX <GO>
Dollar Index intraday movers: DXY <GO>
U.S. stock strategy: TNI USS STRATEGY <GO>
Stock-market top stories: TOP STK <GO>
Charts, graphs home page: CHART <GO>

--Editors: Jeff Sutherland, Michael P. Regan

To contact the reporter on this story:
David Wilson in New York at +1-212-617-2248 or
dwilson@bloomberg.net

 

[rimtas]

 

[CanOz]

The DX as left its prior value area and headed off higher...

Rimtas, its broken out monthly as well.

 

[zac]

Hi rimtas,
I like the way you analyse this fundamentally.
Don't see too many people look at forex that way.
I think its bullish too for the longer term.
Im wondering how much of this has been buy the rumour sell the fact since this rise is based on speculation.

Anyway QE is about to end, unemployment/employment figures are getting better, eventually rates will rise supporting the USD.

 

[DeepState]

Anyway QE is about to end, unemployment/employment figures are getting better, eventually rates will rise supporting the USD.

Projected path of rates embedded into yield/swaps curve:




The expectations expressed by the Fed regionals are more hawkish than the market believes will happen. The difference between 2 and 2.5% is material when rates are so low. This is even more so when inflation expectations over the next 10 years are for 2%pa and well anchored:





US (and EZ) rate rise expectations have consistently surprised to the down side (yields low) which have also affected the curve. Nonetheless, the yield premium for US bonds has increased vs Euro which makes carry progressively more attractive. But the extent to which yields in the US will rise will be attenuated by QQE in Japan and various credit easing and possibly QE initiatives in EZ. There is already a stack of Japanese money flowing into the US looking for a return, for example.






Then you've got to consider the trade and income sides of the equation. Enough for now.

 

[zac]

Cheers for that RY,
Where did you get the graphs from?

Thanks for the in depth take on that too. I am on another subscribed forum (paid) yet its clear that members here have so much broad knowledge.
I feel im the small fish lol

 

[DeepState]

Cheers for that RY,
Where did you get the graphs from?

Thanks for the in depth take on that too. I am on another subscribed forum (paid) yet its clear that members here have so much broad knowledge.
I feel im the small fish lol

More than welcome. This is a big issue for 2014/15 along with the ECB monetary/credit easing and I wouldn't mind getting my ideas tested and honed as I have exposure. There is a guy called Mike M in "Magic Acts and Mass Hypnosis and Popular Delusions" https://www.aussiestockforums.com/forums/showthread.php?t=27824 which you might like to follow. He's very tongue in cheek, but he knows what he is doing. So many things hang off these and it seems a good idea to understand what is possible even if directional prediction is really tough.

Sources are (respectively):
RBA Financial Stability Report just released
Wall Street Journal
Bank For Internal Settlements June 2014 Report
Zero Hedge

 

[rimtas]

Hi rimtas,
Anyway QE is about to end, unemployment/employment figures are getting better, eventually rates will rise supporting the USD.

USD is not rising because the economy is getting better, it is rising because it is the most sickiest currency in the world.
Most of the dollars are debt and USD index represents only those USD that are cash, not debt. Debt is now imploding, so the fight for remaining cash dollars started to emerge at full swing. It is not a good sign, it is actually a very bad sign for markets overall. When market participants who trade stocks start to realize what is happening, they also will join the battle for the remaining dollars selling their shares. So better be prepare for this. Debt implosion is a very bad thing for the markets.

 

[zac]

USD is not rising because the economy is getting better, it is rising because it is the most sickiest currency in the world.

Cheers Rimtas,
Whats your take on the S&P500 rising so much since the GFC?
Too much loose monetary policy, ie QE.
Im not sure what to make of it as the higher implied yields would generally see a rotation of funds from equities to cash for the interest.
However something like 73% of the market is not invested in the markets yet.

Interesting times and while ive not been in the game that long, im not sure theres been a time like this before.

 

[DeepState]

USD is not rising because the economy is getting better, it is rising because it is the most sickiest currency in the world.
Most of the dollars are debt and USD index represents only those USD that are cash, not debt. Debt is now imploding, so the fight for remaining cash dollars started to emerge at full swing. It is not a good sign, it is actually a very bad sign for markets overall. When market participants who trade stocks start to realize what is happening, they also will join the battle for the remaining dollars selling their shares. So better be prepare for this. Debt implosion is a very bad thing for the markets.

Rimtas

This is very interesting. However, my understanding of your viewpoint feels/is incomplete. Sorry if parts are just re-stating the obvious to you. It's just not obvious to me.

Are you saying that:
1. there is USD cash and US denominated debt in circulation...
2. US Federal (and other forms of) credit is on the nose and hence money is fleeing from these into hard cash (definition M0)?
3. The index represents the exchange rate for cash, but this is not representative of the exchange rate for debt to cash from foreign holders?

As a result, you see the combination of rising yields and rising dollar, but this is actually symptomatic of a decaying economic and financial system?

My apologies once again if this is just a rehash. The view is unconventional. Hence my deep and sincere interest.

 

[Trembling Hand]

Cheers Rimtas,
Whats your take on the S&P500 rising so much since the GFC?
Too much loose monetary policy, ie QE.
Im not sure what to make of it as the higher implied yields would generally see a rotation of funds from equities to cash for the interest.
However something like 73% of the market is not invested in the markets yet.

Interesting times and while ive not been in the game that long, im not sure theres been a time like this before.

A lot of chatter lately about the S&P500 companies themselves being responsible for the upward trajectory of the market. Maybe because of the QE but not necessarily the QE money.

http://www.zerohedge.com/news/2014-...ely-indiscriminate-buyer-stocks-first-quarter

 

[zac]

A lot of chatter lately about the S&P500 companies themselves being responsible for the upward trajectory of the market. Maybe because of the QE but not necessarily the QE money.

http://www.zerohedge.com/news/2014-...ely-indiscriminate-buyer-stocks-first-quarter

Cheers TH,
One thing people don't talk about, perhaps through ignorance is the number of share buybacks since the GFC.
Also overall earnings are on the rise. The lack of trading volume doesn't take much to push prices higher.

 

[DeepState]

Whats your take on the S&P500 rising so much since the GFC?
Too much loose monetary policy, ie QE.
Im not sure what to make of it as the higher implied yields would generally see a rotation of funds from equities to cash for the interest.
However something like 73% of the market is not invested in the markets yet.

Interesting times and while ive not been in the game that long, im not sure theres been a time like this before.

Just some high level stuff to throw into the brew:

This chart shows rolling 1 yr fwd expected EPS growth, the PE based on this, and price index (rebased to 100) of the S&P. Key point: the price index diverges from earnings from 2011. Of interest, the PE expansion that has driven markets for recent years has receded in favour of EPS growth in more recent times...a more healthy composition of index growth, some think. Since mid 2014, post the GDP recovery from adverse weather conditions in Q1, expectations have been lifted. It's hard for me to know if these allow for the headwinds that will arise from a stronger currency as SP500 revenue has a substantial offshore component.



The divergence between price and earnings coincided with QE2 from the Fed in late 2010:



This saw risk being brought right in, which is one of the channels that QE works through. The equity market roughly followed suit. This gives you the QE effect on equities. It was also supported by the fact that EPS was actually growing where as many other major markets were not managing to do so at all.



To note in relation to buy-backs: It is true that the amount of cash being returned to shareholders via buy-backs has been growing and is now approaching levels in the pre-GFC period. However, the contribution to EPS growth from buy-backs is virtually non-existent in the last couple of years. Why? Corporates are still deleveraging on a net basis and net issuance of seasoned offerings exceeds buy-back volumes.




Retail is pretty flat in terms of flows to the market over the last couple of years. Insto is accumulating.

There have been times like this before. Most recent one for a major market probably would be the Plaza Accord...excluding those currently in play. Didn't end so well for one of the players.

Notwithstanding the above, the question really is: what next?

 

[rimtas]

Rimtas
Sorry if parts are just re-stating the obvious to you. It's just not obvious to me.
.

Hi RY, in order to understand how USD behaves, you first need to understand what actually is a US Dollar.
I'll try to be as short as possible...

Originally, a dollar was defined as a certain amount of gold. Dollar bills and notes were promises to pay lawful money, which was gold. Anyone could present dollars to a bank and receive gold in exchange, and banks could get gold from the U.S. Treasury for dollar bills.

In 1933, President Roosevelt and Congress outlawed U.S. gold ownership and nullified and prohibited all domestic contracts denoted in gold, making Federal Reserve notes the legal tender of the land. In 1971, President Nixon halted gold payments from the U.S. Treasury to foreigners in exchange for dollars. Today, the Treasury will not give anyone anything tangible in exchange for a dollar. Even though Federal Reserve notes are defined as “obligations of the United States,” they are not obligations to do anything. Although a dollar is labeled a “note,” which means a debt contract, it is not a note for anything.

Congress claims that the dollar is “legally” 1/42.22 of an ounce of gold. Can you buy gold for $42.22 an ounce? No. This definition is bogus, and everyone knows it. If you bring a dollar to the U.S. Treasury, you will not collect any tangible good, much less 1/42.22 of an ounce of gold. You will be sent home.

Some authorities were quietly amazed that when the government progressively removed the tangible backing for the dollar, the currency continued to function. If you bring a dollar to the marketplace, you can still buy goods with it because the government says (by “fiat”) that it is money and because its long history of use has lulled people into accepting it as such. The volume of goods you can buy with it fluctuates according to the total volume of dollars ”” in both cash and credit ”” and their holders’ level of confidence that those values will remain intact.

Exactly what a dollar is and what backs it are difficult questions to answer because no official entity will provide a satisfying answer. It has no simultaneous actuality and definition. It may be defined as 1/42.22 of an ounce of gold, but it is not actually that. Whatever it actually is (if anything) may not be definable. To the extent that its physical backing, if any, may be officially definable in actuality, no one is talking.

Let’s attempt to define what gives the dollar objective value. The dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise to pay an identical promise. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise.

I called the dollar “money.” By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term “money” in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt. I can explain further what I meant by saying "cash dollars" in a previous post, but for today I had enough writing

.........................................................................

To determine what trend dominates the markets everyone can do this by monitoring the two most sensitive barometers of monetary trends. One is the currency market. If the price of the dollar against other currencies begins to plummet, it might mean that the market fears dollar inflation(the opposite is true). On the other hand, it might simply mean that credit denominated in other currencies is deflating faster than credit denominated in dollars or that foreign demand for dollars to buy U.S. stocks, property and products has waned.

The other monetary barometer, which is more important, is the gold market. If gold begins to soar in dollar terms, then the market almost surely fears inflation. As the gold is now in a downtrend, the opposite is obvious.
The bond market will not make the best barometer of inflation because much of it will fall under either scenario.
Sorry for taking too long, maybe you'll find your answers between the lines...
Cheers

 

[DeepState]

Hi Rimtas. Thankyou so much for taking the time to outline your thoughts. I enjoyed your hard currency perspective. In the spirit of discovery via discourse, I outline my thoughts on various points you have made in the event you (or others) feel like correcting or contesting these views. With debt serviceability a meaningful issue, this has importance to USD. So, at least I care!

Today, the Treasury will not give anyone anything tangible in exchange for a dollar. Even though Federal Reserve notes are defined as “obligations of the United States,” they are not obligations to do anything. Although a dollar is labeled a “note,” which means a debt contract, it is not a note for anything.

Congress claims that the dollar is “legally” 1/42.22 of an ounce of gold. Can you buy gold for $42.22 an ounce? No. This definition is bogus, and everyone knows it. If you bring a dollar to the U.S. Treasury, you will not collect any tangible good, much less 1/42.22 of an ounce of gold. You will be sent home.

Some authorities were quietly amazed that when the government progressively removed the tangible backing for the dollar, the currency continued to function. If you bring a dollar to the marketplace, you can still buy goods with it because the government says (by “fiat”) that it is money and because its long history of use has lulled people into accepting it as such. The volume of goods you can buy with it fluctuates according to the total volume of dollars ”” in both cash and credit ”” and their holders’ level of confidence that those values will remain intact.

I understand that the term 'note' was replaced by the term 'bill' around 1971 to reflect the non-convertibility and entirely delinking of the US dollar and gold.

Fiat currency in the past was largely undone by profligate spending by governments and the acquiescence of whatever passed as a central bank at the time. One important reason that fiat stays relevant is the belief that such expenditure won't take place because central banks are more independent than before. And then there is Japan, which defies both arguments. Another important reason why fiat holds is that it is the only acceptable means through which you get to pay your taxes.

In the case of the USD functionality, part of the reason might be the arrangement Kissinger achieved with the Saudis to require oil settlement in USD as the convertibility arrangement ended. This created a demand for dollars.

As for variation in prices, gold was often associated with outright deflation, a form of price instability. From about Volcker, price stability became a staple in the US and something which has been readily achieved. Interestingly, the major problem facing the fiat economies is deflation. To the extent that this exists, it is not at catastrophic levels which is a benefit of fiat in conjunction with fractional reserve banking (if the banks would actually lend). Yes, there are drawbacks to this in the form of periodic financial crises. Pick your poison.

Let’s attempt to define what gives the dollar objective value. The dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise to pay an identical promise. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise.

I called the dollar “money.” By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term “money” in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt.

Why are bills backed by government debt? In creditor nations, which also predominantly (entirely) fiat, there is no net debt and no convertibility. The US just happens to have government debt. You only require the backing of the US government, for this concept, if you buy a government bond. Holding cash requires nothing and it is entirely feasible that we have a cash economy without debt. If the currency was not capable of forgery and had a fairly stable volume, this is akin to gold, denarius or seashells - and fortified by the fact that it was a reasonably acceptable means of exchange for goods, services and tax. I do not think that it is correct to say that a currency is backed by debt. A currency can buy a debt and issuance of debt buys currency. It is no less correct to say that currency backs debt than debt backs currency. This is why definitions of money move from notes and coin though to wider definitions which include debt securities. They are all money.

There are some pretty heavy hitters in monetary economics which are even suggesting a cashless society. Zero currency in circulation. Their reasons are for efficacy of monetary transmission. However, things like EFTPOS and the like highlight that we are heading in that direction. Money won't even exist. There will be debts and credits galore though. Just like now.

In the case of sovereign default, you generally see a depreciation of the currency. However, the mechanics of this are more than to say government default automatically leads to a debasement of a currency (think Greece whilst in EZ). Maybe, maybe not. Certainly depreciation of currencies can happen whilst sovereigns remain intact (think Asian crisis and Taper Tantrum). Hence the link between sovereign default and currency is not tight enough to confidently accept that currency is backed by government debt. I do not think it is. You cannot front up to Treasury with your bill and demand exchange for a government debt. You can, however, seek to buy it in the open market like any other security. Currency is not a claim on a sovereign. It is, however, issued by a sovereign and creates seignorage when this occurs. Something for next to nothing, although transfers in wealth do result from this activity.

Money, today, is intrinsic value. It is a means to exchange stores of wealth for goods and services. It works because...get this...actually, you already get this...we all agree to do it. Our financial system is built on it. Talk about the ultimate fad. Money is as money does. Apparently. The world keeps spinning.

To determine what trend dominates the markets everyone can do this by monitoring the two most sensitive barometers of monetary trends. One is the currency market. If the price of the dollar against other currencies begins to plummet, it might mean that the market fears dollar inflation(the opposite is true). On the other hand, it might simply mean that credit denominated in other currencies is deflating faster than credit denominated in dollars or that foreign demand for dollars to buy U.S. stocks, property and products has waned.

The other monetary barometer, which is more important, is the gold market. If gold begins to soar in dollar terms, then the market almost surely fears inflation. As the gold is now in a downtrend, the opposite is obvious.
The bond market will not make the best barometer of inflation because much of it will fall under either scenario.

At present, the inflation expectations embedded in professional forecaster surveys and embedded in swaps and inflation linked securities converge on a stable figure of 2% per annum. This is an estimate for the next 10 years. So no break out of inflationary or deflationary concerns is indicated. The currency movements (say, vs Euro) have been strongly influenced by carry and, more recently, by the hope and subsequent disappointment for EZ growth.






The price of gold has actually been stable in other major currencies (incl Aussie). Hence inflation in these currencies is implied to be less deflationary than the USD following this argument. However the opposite case is widely observed.

Ultimately, I cannot reconcile concerns for inflation which are not priced into expectations from several angles with appreciation of the dollar. Relative yields are rising and this can directly be traced to QE taper, also from many angles. When coupled with a rising USD vs RoW, this is more a sign of improved demand for US assets and capital which is being formed. It probably also reflects the improved balance of payments position as well (the other side of the ledger).

....a nugget of hard currency for your thoughts?

 

[DeepState]

Item of possible interest.

The following are two 'Dendrograms' which portray the relationship between the major currency pairs. They are all expressed to the USD numeraire to prevent overlap.

Here are the relationships for the last year. The currencies have been standardized for volatility which means we are analyzing the currency characteristics after adjusting the outcomes for the volatility as measured over the analysis period. The USDJPY volatility is adjusted to match the AUDUSD volatility, for example.

The chart below relates to the last 12 months worth of data, analysed daily.



It shows that the CHF and EUR share a very tight relationship and basically move in unison (so what's new). The AUD performed somewhat similarly to the CAD as might also be expected, but this relationship is no where near as strong. As a group, they performed very roughly similary to the JPY. And so on.

The following chart analyses data for the last 90 days.




The underlying idea behind all of this is to break the changes into underlying drivers and try to see if you can figure it out if you are fundamentally oriented or identify which drivers have momentum or reversion. The following chart breaks down the performance of the underlying 'factors' which are moving the currencies, They are statistically determined and do not explicitly say what is going on. Some people trade based directly on these. Some people will try to figure out what they are via a range of methods to see what they make of the major currency drivers. This is where the alpha is created and skill is required.

The chart below shows the day to day performance of the major drivers. You can see big spikes, particularly in the first series (blue). Different currencies have different sensitivities to each of the factors.



The volatility of the factors is of very significant importance. These form the core of many risk estimation techniques and practices used widely in the institutional world of currency trading. It can be argued that this produces a degree of financial system instability because the practice is so common.

Tech notes: PCA, Euclidean distance, all items detrended and standardized hence analysis of correlation rather than Covar, inner square distance. Anyone out there?

 

[rimtas]

From my point of wiev, USD is topping. After one more pop-up it should begin the largest correction in the last 7 months. AUD should rise I suppose if this is about to happen.
Gold and silver have made their bottoms already and should advance in a multimonth rally. Probably even oil will reverse it's course.