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.

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.

Did the U.S. Dollar Put in a Permanent Low?

Last week saw the wildest U.S. dollar and euro currency swings in quite a while. The U.S. dollar index fell to new lows, the euro spiked to new highs. Both reversed violently thereafter. Is this the beginning of a trend change?

For well over six months the U.S. dollar, euro, and EUR/USD have been trading in a frustratingly tight range, but last week saw some noteworthy action.

On May 8, the U.S. dollar index traded below 18-month support (blue circle) at 79.

Based solely on technicals, the May 8 dip should have led to more selling.

However, the May 7 Profit Radar Report, which recommended a small long U.S. dollar position earlier, outlined why a dip below 79 might be a bear trap:

The U.S. dollar is teetering just above important support at 79. Based solely on technicals, a drop below 79 would be a sell signal and unlock a target around 76. However, a drop below 79 could also turn into a bear trap. Here’s why:

There is generally an inverse relationship between the dollar and U.S. stocks. Although this relationship comes and goes, the seasonal pressure on stocks should be positive for the dollar (more details on stock seasonality below).

Euro cycles will soon turn temporarily bearish.

Euro is close to up side target at 1.40.”

No doubt the quick headfake below 79 triggered an avalanche of stop orders, which fueled the vigorous rally since. The corresponding U.S. dollar ETF is the PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP).

As mentioned in the May 7 Profit Radar Report, one of the reasons the dollar down side was limited, is because the EUR/USD was close to our up side target at 1.40.

The chart below shows EUR/USD (CCY: EUR/USD) resistance around 1.40 and a violent reversal from the 1.3992 high. The most closely correlated euro ETF is the CurrencyShares Euro Trust (NYSEArca: FXE).

Last week’s reversals may well be the beginning of a new trend, but it will take a move above short-term resistance to unlock new targets.

The May 7 Profit Radar Report also mentioned seasonal pressure for stocks. Everyone knows about the chewed-out ‘sell in May and go away’ adage.

Here is why to expect seasonal weakness for stocks, but first we’ll have to wait for all the ‘early adopters of the sell in May strategy’ to get burned. More info here:

S&P 500: 3 Reasons to Expect the May Blues … But Not Yet

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.

Could a Strengthening Dollar Sink Stocks?

On a walk down memory lane, we discover bold statements like this one – “Nobody wants toxic US dollar” – made in April 2011. Today the dollar trades 8% higher. In fact, the dollar is right above key support. Will it hold and potentially sink stocks?

According to analysts, the US dollar has been doomed ever since the Federal Reserve started QE back in 2008. Every new round of QE draws the dollar doomsday crowd out of their den. To wit, I’ve included a few headlines below:

April 8, 2011: Toxic Dollar: Why Nobody Wants US Currency – CNBC
June 15, 2011: Dollar Doomed to Drop – UBS Technical Analyst
July 28, 2011: U.S. Dollar Poised for a Plunge – Peter Schiff

But nearly five years later, the greenback is holding its ground.

It may not be the strongest currency of the global currency basket, but the US dollar today – and that may be hard to believe – is trading exactly where it was back in 2004 (dashed purple line).

Albeit choppy, since August 2011 the dollar has consistently climbed from higher lows to higher highs.

Connecting the recent lows creates obvious support (green trend line).

The US Dollar Index came within striking distance of this trend line last week.

Will Support Hold?

A trend line is called a trend line because it delineates a trend. In this case an up trend. The trend remains up as long as price stays above the trend line.

Being aware of such trend line support is important for at least two reasons:

1) The trend line makes it clear that the dollar is at a key inflection point. Key support is like a rung on a ladder. If the rung breaks, you fall. If support fails, the dollar falls. If support holds, the dollar should ‘climb up.’

2) Dollar strength or weakness is not just a currency story; it’s also an equity event. There is a correlation (see below) between movements of the US dollar and stocks. A US dollar rally may lead to falling stocks. Why?

A falling dollar is good for exports and corporate profits and therefore good for broad US indexes like the S&P 500 (SNP: ^GSPC). A rising dollar is generally bad for corporate US profits.

Based on my assessment, the odds of a sustained dollar rally are currently greater than the odds for a decline.

The PowerShares DB US Dollar ETF (NYSEArca: UUP) provides long US dollar exposure. If support fails, it may be time to look at the PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN) or CurrencyShares Euro Trust (NYSEArca: FXE).

Exactly how strong is the correlation between stocks and the S&P 500 (NYSEArca: SPY)? Could a US dollar rally sink stocks?

This article about the US Dollar/Stock Correlation shows exactly what a strengthening dollar would mean for US stocks.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF