Sentiment is still very anti-dollar (though not as extreme as last February-April), but the index is no lower than a few months ago, nor even a few years ago. Despite all of the dollar-crash and hyperinflation hysteria in recent years, early 2008 still marks the bottom.
MACD and RSI also seem to back up the case that the next big move is more likely up than down:
3 year daily chart:
5-year weekly chart:
The 10-year chart says it all: the dollar has already crashed, and as is typical in the financial markets, few noticed or attempted to take action until the move was already over.
Here’s a chart that goes back further but only goes up to 2010 (I couldn’t figure out how to get barchart.com to draw me the whole thing, but you can just use your imagination – the line just goes straight up from $30 to $45):
Gold’s march upwards has been much more orderly, but silver is a thin market and prone to spikes. These things are tough to short, and to attempt to do so you should wait for a pause and use a stop above the highs, but even with a stop a fast market like this could spike dollars in minutes or seconds and close you out at a big loss only to reverse. This chart doesn’t show the action that happened intraday one day in Jan 1980 when silver traded over $50 very briefly. No reason why it couldn’t spike to $70 next week only to crash and languish at a new normal of $10-20 for the next two decades.
It is safer in a way to buy puts than to short SLV or sell futures, since your risk is defined – you can only lose what you put up. The July 35-strike puts on SLV were going for less than 60 cents on Wednesday, and will get cheaper every day until silver falls. June 35s are under 40 cents and will decay faster but pay off better in a crash. At any rate, I’d take a disciplined approach and figure on losing my premium at least once, buying higher strikes if the spike continues upwards. Losing the first premium or two would be acceptible if a later position pays off 10:1.
Take another look at this long-term dollar chart. We had a major bottom in 1980 just as everyone was panicking into precious metals. Silver spikes are apparently another symptom of extremely negative dollar sentiment, so should be considered bullish for the currency.
BTW, though gold’s price and action is much more sensible, the silver spike is very bad for gold as well – it may just have doomed its bull market. The metals have more than adjusted for the inflation of the last 30 years and the money printing of the last 3. It would make sense for their run to end soon and for them to settle into some middle ground. That doesn’t mean gold can’t touch 2500 and silver can’t hit 100 – it’s just that these moves are too fast and too high relative to their historic multiples to other assets, so these prices will not last.
Long-term gold charts (first one is a few weeks old – the second is current but doesn’t go back as far):
Uh, it already has. The time to be shouting about a crash was 2000, but the dollar-crash meme only got mainstream in late 2007. As you can see in this 10-year chart of the trade-weignted dollar index, the dollar had by then already fallen, and is no lower today than 3 years ago. It may be putting in a triple bottom prior to a secular bull market. The sentiment has certainly been negative enough for long enough to set up a lasting upturn, and the price action in recent years is similar to that of the late 80s to early 90s.
EDIT: Here’s a 30-year dollar index chart.
A secular bull market in the dollar would coincide with more unwinding of risk assets, since the buck has been a favored short for the carry trade (it is weak vs. other currencies, and has very low borrowing costs).
It would also make sense for US Treasury rates to finally put in their secular bottom during the dollar’s bull market, but not in the first phase. Interest rates follow a very long cycle, with the last top in the early 1980s and the last bottom in the early 1940s. Sentiment is still too anti-bond, and there is still too much credit unwinding to come for me to believe that bonds are ready to start falling. Bonds, after all, are hard cash for big players, and people reach out the curve for yield as short-term rates compress during credit stress.
The franc has taken a beating against the dollar, since it pretty much behaves like a slightly harder euro. Here is an hourly chart (click to enlarge):
Sentiment readings have been super bearish here for a couple of weeks now, so we’re set for a reversal. At the least, going long the franc is not a bad way to hedge a portfolio that is long-term short risk (stocks, junk bonds, commodities).
Sentiment in each of these markets is as lopsided as it ever gets, with over 20 gold bulls for every bear and that many euro bears for every bull. Levels have remained extreme for 2-3 weeks now with no relief, so be on the lookout for violent reversals.
Don’t sell short the Yen just yet. It is wedging up to the highs and still seems to find a bid when stocks fall. I noticed this large wedge on the USD.JPY 5-year:
A breakout of that wedge will be bearish for Yen, and a nice spot to think about shorting. For now, I’m letting it run, since the Yen is still the only thing stronger than the dollar in deflation. Note, however, that each subsequent move down in dollar/yen is shallower and choppier than the last, hinting at a pending reversal.
Here’s another way to look at it. There’s still an unbroken longstanding support line in Yen/Dollar, but the rise in 2009 was choppier and at a shallower angle than previous rallies. You can also see in weekly RSI that the trend is tiring:
Sentiment is still really lousy and downside momentum is waning. This is the same condition that persisted in the dollar from August through November before violently clearing. No telling how long this holds up, but I would not want to get caught short without a stop here — one day you could wake up and find out that it’s spiked 3 cents overnight.
Of course, I am bearish on the commodity currencies CAD, AUD, NZD and ZAR (and actually also JPY as of this evening’s spike), and if these fall the euro is likely to make new lows. Conversely, a euro spike would likely coincide with a general dollar sell-off.
Some kind of news about Greece or other GIPSIs could be a nice catalyst for a rally — it doesn’t quite matter what the news is, just that there is something to get people trading. The crowd’s reaction often makes very little sense and can’t be predicted by news alone.
Note the upsloping daily RSI from very oversold conditions. Sentiment remains highly negative, so any upward movement would surprise the majority of traders and possibly result in a short-squeeze like Sept 08.
You don’t have to be very sure that the euro will rally — I’m not — to take this trade. The recent lows make such a clear and close stop position that the risk/reward balance is quite good.