US Dollar and Euro Outlook

At the beginning of the year, the US dollar was the most despised asset of the investment universe. Headlines like the ones below were common:

  • Why it may be downhill from here for the US dollar – MarketWatch
  • USD poised for a bear market – FXStreet
  • U.S. dollar bear market: 3 reasons it can continue – SeekingAlpha

Contrary to the prevailing opinion, the Profit Radar Report was looking for a major US dollar bottom and a major euro top (the US dollar and euro move in opposite directions).

The February 15 Profit Radar Report published the chart below and stated: “Regardless of the when and where exactly the EUR/USD tops, the next major move is expected to be to the down side.”

The chart highlights technical resistance for the EUR/USD and a very bearish posture by commercial hedgers (smart money).

The EUR/USD (or euro) topped the next day, but wasn’t in a hurry to move lower.

The March 24 Profit Radar Report stated that: “Back in February cycles were not yet bullish, but that’s about to change. Smart money hedgers remain near record bullish. Although it is possible for the USD to carve out one more low (blue labels), its not required. We are looking for a significant USD rally and EUR/USD decline in 2018.

The charts below (published in the March 24 Profit Radar Report) shows a detailed US dollar Elliott Wave projection and long-term EUR/USD projection.

In addition to sentiment and Elliott Wave Theory, basic technicals showed bullish divergences at the February US dollar low, and up trend confirmation throughout the rally since.

What’s Next?

Over the coming 1 – 3 months the pace of this advance is likely to slow as the dollar carves out a small wave 4 correction and wave 5 rally, which should be followed by a larger wave 2 decline.

Once this sequence is complete, the dollar will probably rally strongly for many months, causing havoc on assets (particularly foreign US dollar denominated bonds) around the globe.

This will be a major theme and trend in the months/years to come. We do not want to miss the upcoming opportunities caused by the ripple effect of a rising dollar. As always, opportunity for some will mean risk for others.

Continued updates, along with trade recommendations, will be available via the Profit Radar Report.

ETFs that benefit from a rising dollar and falling euro include:

  • PowerShares DB US Dollar Bullish ETF (UUP) – Dollar ETF
  • ProShares UltraShort Euro ETF (EUO)
  • or short the PowerShares Euro ETF (FXE)

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

The Biggest Trap of European QE

The cat is out of the bag. The ECB will buy up to euro60 billion a month from March 2015 to September 2016. Purchased assets will include government bonds, debt securities by European institutions and private-sector bonds.

Why? Eurozone inflation is negative. Deflation is bad news, and pumping money (QE) into financial markets is hoped to fight deflation and spark inflation.

Inflation, by definition, erodes the value of a currency. The obvious conclusion; eurozone QE should send the euro lower.

But if something is too obvious, it can obviously wrong.

Let’s take a look at what U.S. QE did for the U.S. dollar.

The chart below plots the U.S. Dollar Index against the various QE programs.

QE1 saw wild dollar swings, but no discernable down side bias. In fact, the dollar rallied when QE fist started.

QE2 didn’t sink the dollar either and the greenback actually rallied during QE3/4.

Headlines like ‘Why quantitative easing is likely to trigger a collapse of the U.S. Dollar’ proved incorrect.

The euro lost 18% since May 2014. This is one of the most pronounced declines in recent history.

In 2008 the euro lost 23.1% before bouncing back, in 2009/10 21.5%. Technical support for the euro is not far below current trade, so shorting the euro is akin to picking up pennies in front of a train.

Contrary to conventional wisdom, investors should put the CurrencyShares Euro ETF (NYSEArca: FXE) on their shopping list and start exiting the PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP).

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Can The Dollar/Stock Correlation Predict The Next Move?

A rising dollar has spelled trouble for stocks for much of the 21st century. Right now the US dollar is sitting right above important long-term support. The odds of a dollar rally are above average. Does that mean lower stock prices? Here’s a detailed look at the correlation between the dollar and stocks.

Everybody (including me) is trying to get a handle on the market they follow, but not ‘all roads lead to Rome’ when it comes to market forecasting.

Some roads (aka market forecasting approaches) are simply dead ends.

Correlations between asset classes and currencies are a legitimate tool to estimate future moves.

One of those relationships is the correlation between stocks and the US dollar.

Theoretically a falling dollar is good for US stocks. Why? A falling dollar makes US products cheaper in foreign countries, which in turn is good for US profits and stocks.

Does the theory hold up in real life?

The first chart below plots the S&P 500 against the PowerShares US Dollar Bullish ETF (NYSEArca: UUP), a proxy of the US dollar.

Obviously, the correlation is an inverse one and somewhat difficult for the untrained eye to detect.

The second chart plots the S&P 500 (NYSEArca: SPY) against an inverted UUP. This makes the correlation a bit more apparent. In fact, comparing the S&P 500 (NYSEArca: IVV) to the inverse dollar is almost like comparing it to the euro (NYSEArca: FXE).

The correlation held up for much of July 2008 to November 2011. What happened in November 2011? Operation Twist was reintroduced, but I’m not sure if that’s enough to upset the correlation.

Regardless of the cause, since November 2011 investors haven’t been able to count on the US dollar/stock correlation to predict future moves for either stocks or the dollar.

Still, it is interesting to note that the dollar is close to important long-term support with above average odds of rallying from here. The red boxes in the first chart shows that recent dollar rallies usually turned into speed bumps for stocks.

So, there’s reason in not ignoring the dollars effect on stocks entirely.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF