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.

Dollar, Euro, Gold Update

Dollar Update

The January 2 Profit Radar Report published this chart and long-term US Dollar Index forecast:

The US Dollar Index could be at or near the end of a 5 ½ year rally. As per Elliott Wave Theory, it is possible to count 5 waves up from the May 2011 low. There are bearish divergences at the December highs, and investor sentiment is in favor of a lower dollar. We are alert for a potential multi-month US dollar decline.”

As it turns out, the US Dollar Index actually peaked on January 3, and spent the next 8 months falling lower.

In August/September we were expecting a bottom, but at the time we were not sure how big of a bounce to expect.

In November it became clear that the rally from the September 8 low to the October 27 high was only 3 waves, a first indication that the dollar bounce was over (a 5-wave move higher would have marked a trend change according to Elliott Wave Theory).

The chart below reflects the most likely Elliott Wave Theory count, which projects a more significant low in early 2018.

Smart money dollar hedgers are near record long the dollar, which could lead to a more sustainable rally even before the dollar reaches new lows (a solid close above 95 prior to a new low would suggest that the wave 5 low is already in).

However, hedgers are often early and may become even more bullish in the coming weeks. The lower the dollar falls, the better the buy signal.

Corresponding long dollar ETF: PowerShares DB US Dollar Bullish Fund (UUP)

EUR/USD (Euro)

The euro (EUR/USD) generally moves in the opposite direction of the dollar.

Since the above dollar analysis provides a multi-month forecast, we’ll use the EUR/USD for a short-term outlook.

On November 14, the EUR/USD broke above the black trend channel, and re-tested that channel on November 21 (blue circle).

The November 20 Profit Radar Report said that: “The EUR/USD is near support around 1.17. This could serve as springboard for new recovery highs.”

We now expect a rally above 1.21. The gray trend channel provides some short-term support/resistance levels. Trade should not drop below 1.17.

RSI appears unlikely to confirm new highs above 1.21, which would harmonize nicely with our expectation of a larger pullback.

Smart money euro hedgers, however, are nearly record short the euro, which will draw the euro down eventually. We’d love an opportunity to short the euro above 1.21 against a bearish RSI divergence.

Corresponding inverse euro ETF: ProShares UltraShort Euro (EUO)

Corresponding euro ETF: CurrencyShares Euro Trust (FXE)

Gold

This September 28 article included a detailed long-term outlook for gold.

The October 4 Profit Radar Report said all there was to know about gold for the weeks to come: “Support for gold is at 1,245 – 1,260. Resistance is at 1,298 – 1,304. For now, gold is likely to trade between support and resistance.”

Gold is pushing the upper boundary of the outlined trading range, but thus far there’s been no breakout. Silver failed to confirm gold’s push higher, which can be a warning signal. On balance volume has been increasing, which is a positive. Nevertheless, we would view a break above 1,307 with suspicion.

Corresponding gold ETFs:
SPDR Gold Trust (GLD)
iShares Gold Trust (IAU)

Corresponding inverse gold ETFs:
ProShares UltraShort Gold (GLL)

Continued forecasts for the US Dollar, EUR/USD, gold and silver are available via the Profit Radar Report.

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.

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How Low Can the Euro Go?

If you read my market commentary, you know that I went into 2015 expecting to buy the euro and hold precious metals.

Neither prediction has paned out (thus far), but rather than covering the issue with a veil of silence, I thought you’d appreciate an update.

Gold Rally Cut Short

Early warning signals in January (sentiment, seasonality, Elliott Wave) cautioned that the gold rally may terminate prematurely. Via the January 27 Profit Radar Report, I recommended selling gold positions for gains as high as 13% (see ‘Gold Seasonality and Sentiment Turned Frosty’ for more details).

Gold may carve out a double bottom and we may get a second bite of the cherry in coming days/weeks.

What about the euro?

We bought the euro on January 23. Ways to play the euro include euro futures, EUR/USD or CurrencyShares Euro ETF (NYSEArca: FXE).

The euro rally looked promising initially, but failed to summon the momentum needed to break higher.

The February 28 Profit Radar Report warned that: “The euro continues to trade sideways. This is looking more and more like a bearish triangle, which would require a thrust to new lows.”

The accompanying recommendation was to either close euro positions at breakeven, or hedge them with the PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP).

I’m not bucking the down trend yet, but still believe that the euro will rally for much of 2015.

If things go ‘according to plan,’ the euro should find support around 1.07 – 1.05 (watch the green support line) and rally from there. A new RSI low (lower panel) would alter this expectation.

In summary, although the euro rally did not materialize (yet), we exited the January trade without damage, and we were actually able to grab some nice profits from the gold trade. The renewed selloffs should offer another buying opportunity soon.

Simon Maierhofer is the publisher 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 and 17.59% in 2014.

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.

How Does the Swiss Currency Move Affect US Investors?

Here are the most important words of 2015, thus far:

“Die Schweizerische Nationalbank (SNB) hat beschlossen, den Mindestkurs von 1.20 Franken pro Euro per sofort aufzuheben und ihn nicht mehr mit Devisenkäufen durchzusetzen. Der Ausstieg musste überraschend erfolgen.”

Translated: The Swiss National Bank (SNB) determined to immediately abandon the 1.20 EURCHF floor via currency purchases. This move had to be a surprise.

From September 2011 up until a few hours ago, the SNB has printed francs to buy euros. This kept the value of the franc artificially low.

Why Did the SNB Abandon Franc ‘Stability’

According to Thomas Jordan, President of the SNB, the euro and the franc weakened relative to the U.S. dollar. It therefore was no longer justified to enforce the minimum exchange rate.

Jordan said that maintaining the franc cap long-term would make no sense.

The SNBs balance sheet mushroomed 280% since 2008. Unlike other central banks, the SNB owns predominantly foreign assets, subject to significant currency risk.

It couldn’t depress the franc forever, so now apparently was an appropriate time to stop cold turkey.

It is said that the SNB wanted to move before the European Central Bank (ECB). The ECB is expected to unleash outright QE at next week’s (Thursday) meeting, which will depress the euro even further (more below).

What Does it Mean for Switzerland

Today was a rough day for Swiss investors as the Swiss Exchange closed 8.67% lower. Longer-term, a strong franc is obviously bad for Swiss export and tourism. Swatch CEO Hayed said: “It is a terrible day for corporate Switzerland.”

The surprising rogue SNB move threatens its credibility with market participants worldwide and will make cooperation with the ECB harder.

But the Swiss are no Alpine dummies; they must have weighed the pros and cons and made a decision that’s best for them, a luxury some European Union countries no longer have.

A German/Swiss saying goes something like this: The soup is never eaten as hot as it’s cooked. Although the SNBs decision is today’s ‘hot’ news, its effect tomorrow may only be lukewarm.

Of course, another saying says: You crumbled the cracker in the soup, now you’ve got to eat it (kind of like: you lie in the bed you made).

What Does it Mean for U.S. Investors

Many U.S. hedge funds were short the Swiss franc … and were crushed. My first reaction is that a dose of reality might be an educational change for our financial engineers. It remains to be seen what margin calls will mean for the market.

Most individual investors don’t invest in Swiss currency (NYSEArca: FXF) or swiss stocks (NYSEArca: EWL), so the direct exposure and damage is limited. Broad international ETFs like the iShares MSCI EAFE ETF (NYSEArca: EFA) are actually up today.

U.S. stocks are down again, but that may or may not have been caused by the SNB.

Perhaps more importantly, gold prices soared 2.5%. Via the November 5 Profit Radar Report, I made the (at the time controversial) recommendation to buy gold at 1,140 and GLD at 111.08 and stated that: “Buying and holding gold appears to be one of the best opportunities for the remainder of 2014 and 2015.”

An interesting tidbit: Gold prices topped in September 2011 when Switzerland started to cap the franc.

The next big opportunity may be buying the euro. The ECB is expected to unleash the European version of QE, which theoretically will depress the euro even further.

However, the euro (NYSEArca: FXE) decline is long in the tooth and investor sentiment is extreme. The odds of a major euro rally starting sometime in the next two weeks are high.

I’ll try to identify a low-risk entry point and publish it in the Profit Radar Report.

Simon Maierhofer is the publisher 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.

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

Smart Money is Buying Euro and Selling Dollar

The euro has been more or less in freefall mode since May 2014. Downside momentum increased even more this week.

Nevertheless, commercial traders, industry experts with deep pockets, have been buying the euro.

The chart below plots the euro against net long positions (as percentage of open interest) by commercial traders (data source: Commitment of Traders Report).

As the red lines illustrate, commercial traders are often early, but eventually proven correct. Sentiment is favorable to look for a euro bottom.

The EUR/USD chart shows the currency slicing through support levels like a knife through butter.

Despite the euro’s renewed freefall since the beginning of 2015, RSI has not confirmed the new lows.

There are a couple of support levels around 1.18, so based on sentiment and technicals it is possible that the euro will carve out a low and stage a significant multi-month retracement rally.

ETFs that benefit from a change of trend are the CurrencyShares Euro ETF (NYSEArca: FXE) or PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN).

Leveraged ETFs are available, but are thinly traded.

A euro rally will obviously affect commodities like oil, gold and silver.

Continued updates will be provided via the Profit Radar Report.

Simon Maierhofer is the publisher 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.

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

Euro and EUR/USD at Multi-Year Inflection Point

This simple EUR/USD (or euro) chart doesn’t necessarily tell you where the euro is headed next, but it contains information that could protect any euro, dollar, or even S&P 500 investor from making an outright stupid move.

This is a big potential pothole for any investor looking to buy or sell the euro, dollar or EUR/USD.

This article will look at the EUR/USD (CCY: EUR/USD) pair, which reflects how many U.S. dollars are needed to purchase one euro.

There is no ETF that tracks the currency pair (as EUR/USD does), but here are four basic dollar and euro ETFs:

CurrencyShares Euro Trust (NYSEArca: FXE)
UltraShort Euro ProShares (NYSEArca: EUO)
PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP)
PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN)

The analysis of the EUR/USD currency pair will affect all of the four ETFs (FXE, EUO, UUP, UDN) and protect against getting stuck on the wrong side of the trade.

The EUR/USD chart shows an ever-narrowing trading range. Using two basic trend lines we can outline the upper and the lower trading boundary.

The EUR/USD touched the upper boundary three times and continues to trade near this resistance trend line.

The simple approach is to be bearish as long as trade remains below the trend line and get bullish if it rallies above.

This chart is not just significant for currencies only, it is also of interest to stock investors.

The chart above plots the S&P 500 against the EUR/USD pair. Although the correlation is not perfect, a rising euro and EUR/USD is generally positive for the S&P 500 (SNP: ^GSPC).

So what’s next for the S&P 500? Here’s a detailed short-term analysis for the S&P 500: A Revised Short-term S&P 500 Outlook

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.

Europe’s ECB Warden Draghi is Alarmed … For the Wrong Reason

Like Bernanke, ECB President Draghi is famous for flooding the European financial system with cheap money. The European QE (LTRO) has brought forth some side effects that have Draghi worried, although for the wrong reasons.

This came in from Germany’s Handelsblatt newspaper:

European Central Bank (ECB) President Mario Draghi is concerned about the European banking system and is ready to unleash more emergency loans.

His concern however is over the ‘wrong reason.’ What’s the wrong reason?

Excess liquidity in the European financial system has dropped from 800 billion euro to euro 225 billion.

This sounds like bad news, but it’s not.

Liquidity has dried up because European banks are paying back their 3-year LTRO loans sooner than necessary.

Here’s a brief refresher on LTRO, which stands for Long-term refinancing operations. LTRO is essentially the European counter part to QE.

There were two tranches, LTRO I and LTRO II.

  • Via LTRO I (December 21, 2011) the ECB provided euro 489 billion worth of 1%, 3-year loans to 523 banks.
  • Via LTRO II (February 29, 2012) the ECB provided euro 529.5 billion worth of 1%, 3-year loans to 800 banks.

Good News, Bad News – All Good News

This is a good news/bad news kind of scenario.

The good news is that banks are doing well enough to repay their loans sooner.

The bad news is that shrinking liquidity has resulted in higher interest rates for bank-to-bank lending.

This development threatens to choke the economic recovery in the euro zone.

“We will watch this development very carefully,” says Draghi.

No doubt they will. How dare a natural side effect of an artificial medicine challenge the EU spin doctor.

What it Means for Investors

In theory more euro loans would be bad for the euro (NYSEArca: FXE) and good for the dollar (NYSEArca: UUP). In reality, technical analysis is likely a better indicator if you are trying to figure out what’s next for the euro and dollar.

How will it affect European stocks? If European stocks (NYSEArca: VGK) respond to liquidity like US stocks (NYSEArca: SPY), we can assume that good news is good for European stocks (NYSEArca: FEZ) and that bad news is good for stocks, as long as the ECB keeps the money going.

To assure just that, Draghi confirmed that banks will have access to cheap money for years to come.

Below is a small selection of news featured in German newspapers (translated into English). You’ll find that German news sometimes brings out facets omitted domestically or simply offer a different take.

Simon Maierhofer is the publisher of the Profit Radar Report.

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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

 

Renewed Euro Concerns May Coincide with Euro Currency Bottom

‘Bad News Europe’ is back in the headlines and the euro is trading at a three and a half month low. European contagion concerns appear to be bearish for the euro currency, but technical analysis provides a different outlook.

Negative European news just made their first media appearance of 2013 and the prospect of a Cypriot bailout sent the euro currency to the lowest level since December 10, 2012.

Renewed concerns about the euro zone sound bearish for the euro, but technical analysis suggests the euro currency is ripe for a (temporary) comeback.

The chart below tracks the euro since the July 2012 low. It also shows some of the trend lines and support/resistance levels the Profit Radar Report uses to pinpoint highs/lows and reversals.

The February 2013 high coincided exactly with parallel trend channel resistance. On January 30, the Profit Radar Report warned that: “The headwind is getting strong. A close below 1.3488 will be the first sign of an impending correction.”

This was followed up on February 3 by the observation that: “The euro spiked to the upper parallel channel on Friday, a potential stopping point for this rally.”

The euro has fallen precipitously since. Today’s drop created a green candle low which was unconfirmed by RSI – a bullish RSI divergence.

A bullish RSI divergence in itself doesn’t mean the euro won’t fall any further, but two multi-year support levels (solid and dashed green line) suggest that the down side for the euro should be limited.

The CurrencyShares Euro Trust (FXE) is a currency ETF that tracks the euro currency closely and provides easily accessible long exposure to the euro.

A word of caution, it appears that the upcoming euro rally will only retrace a portion of the previously lost points and may not reach new recovery highs.

We also note that the euro dropped to a new multi-month low, while the US dollar didn’t eclipse last weeks high. I’m not sure what this divergence means, but it’s reason to take a cautious approach.

Regardless of this divergence and the next moves longevity, simple RSI and support/resistance level analysis like this identifies low-risk trade set ups and the risk management levels needed to spot an attractive risk/reward ratio trade.

The Profit Radar Report analyzes the S&P 500, euro, dollar, gold, silver, Treasuries and other indexes/ETFs to provide low-risk and high probability trade setups.