It is not the fundamental that changes on a daily basis but the market thinking on the fundamentals.
The Logic: Global Volatility + Fear of US recession = US Fed will have dovish stance when it comes to monetary policy
Global Markets tanked big time in January and there is now a growing belief that under current circumstances, US Fed cannot raise interest rates. There is also fear that US economy has run its course.
Result: A strong sell off in Dollar Index
US dollar was looking for reasons to break past 100.5 but with disappointing sets of data on US economy (Slow down in Services sector) - dollar index has pulled back from the resistance point. It is now trading below 50-week ma and if the weakness persists - dollar index can pullback to levels of 93. By no means - dollar index bull market has ended. As of now - it appears a cyclical pullback
Impact: Weakness in Dollar index = Strong rally in Dollar denominated assets
Most of the Global commodities like Crude, Gold, Copper are priced in dollars. Any weakness in dollar index means rise in the value of these commodities. Copper is up more than 10% since mid Jan. No wonder - after a long time: Gold miners ETF GDX is trading above 200 dma
When the boat gets tilted too much on one side, then it overturns.
Just look at the sell-off in Commodities over last few years.
Commodities were oversold and due for bounce. The weakness in dollar index has given that opportunity for some short-term pullbacks in commodities.
Commodities are up, stocks are up. Commodities are down, stocks are down. This has been the story of 2016 thus far
— Deepak Singh (@smarket) February 5, 2016
The weakness in dollar index is also good news for US companies with international exposure - non-dollar revenues. The weakness will help the revenue numbers of those S&P500 companies. It looks like weak dollar is making everyone happy as of now but remember this is just a cyclical play. Market is just balancing out the excesses on one side. Structurally, nothing has changed. Commodities are in long-term Bear market and dollar index will eventually rise again.
Please share your comments on what you think of market observations, market and trading in general
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers