Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the U.S. Dollar is Ready to Rebound, Anatomy of an Inflection Point

Currencies / US Dollar May 10, 2011 - 09:01 AM GMT

By: Money_Morning

Currencies

Diamond Rated - Best Financial Markets Analysis ArticleJack Barnes writes: For most of the past year, anything involving the U.S. dollar has been what traders like to refer to as a "one-way trade."

And with good reason: Over the past year, the U.S. currency has traded in only one direction - down.


Indeed, during the period in question the dollar is down 8.3% against the British pound, 11.65% against European euro and 14.2% against the Japanese yen. On a year-over-year basis, the biggest gains against the dollar have been notched by the Australian dollar (20%) and the Swiss franc (26.7%).

This freefall by the greenback is part of the reason that gold and silver soared to new records and commodity prices have zoomed during the past year (before their decline in the past week).

But here's the thing: This nosedive by the dollar is ending - with a U-turn that's going to send the U.S. currency into a zooming climb.

Traders refer to this abrupt reversal-of-fortune pattern as an "inflection point."

And those traders recognize this about-face in the U.S. dollar for exactly what it is: A windfall profit opportunity for investors who understand just how to play it.

Anatomy of an "Inflection Point"
Since June, when it achieved its most recent peak, the U.S. dollar - as measured by the benchmark U.S. Dollar Index (DXY) - plunged more than 14%.

The greenback has rallied a bit in the early part of this month. But there are much bigger gains to come - the kind of gains associated with a true financial asset "inflection point."

To understand the about-face that we're about to experience, it's important to understand there were essentially five factors that tipped the greenback over into its nose-dive. Those factors included:

•A Debt-Intent Central Bank: A big part of the demise in the near-term value of the U.S. dollar was the continuation of a U.S. Federal Reserve monetary policy that caused the central bank's balance sheet to balloon from $850 billion in 2007 to a new all-time high of $2.669 trillion in April of this year. Indeed, the Fed's balance sheet grew by $340 billion during the last year alone.
•A Debt-Addicted Federal Government: Global interest in the dollar was further diminished by a U.S. federal debt load that soared from $8.9 trillion on Aug.1, 2007 (when the first signs of distress really hit the financial markets) to $14.298 trillion just 3.7 years later.
•A New Market Rival: Thanks to some market machinations by China's government -which has caused that country's yuan (renminbi) currency to rise slowly against the U.S. dollar while dropping against China's other trading partners - the U.S. currency has grown progressively weaker. This has been driven by Chinese interventions in the so-called "FX" (foreign-exchange) markets on an almost-daily basis.
•A Global Leadership Vacuum From Washington: It's a sad-but-true fact that the United States no longer commands the respect that it once did on the world stage. And much of that is the fault of Washington, which has lost touch with what's important both here at home and abroad. This lack of respect has helped diminish the "reserve status" of the U.S. dollar, leading to a bit of a run on the American currency.
•The ‘Mortage-Backed Securities" on the Fed's Balance Sheet Fueled the Real Dollar Collapse: That real dollar collapse arrived as the implications of the Fed's monetization of MBS holdings hit home. In simple terms, people around the world have felt that America's central bank was debasing its own currency with the purchases of mortgage-backed securities (MBS) from U.S. banks that had been left holding the bag for some horrid trades. The Fed handed those bankers freshly minted U.S. Treasury bonds.

With each of these preceding five factors at work, it's little wonder that the United States was essentially debasing its own currency - leaving the leaders of other countries to watch as they scratched their heads in rueful disbelief.

In reality, Wall Street has been able to talk Washington into just about anything it needed - even though most of these schemes robbed Main Street consumers of their middle-class buying power. The obvious debasement of the American currency reached the point internationally that investors wanted to own anything but the U.S. dollar.

The accompanying graphic illustrates how investors have abandoned the dollar as they fled into other asset classes over the past year.


You only have to look at the results for a few seconds to see that the reserve status of the U.S. dollar was being abrogated. It didn't hit the lows it reached during the depths of the global financial crisis but it got darned close.

Now, however, the inflection point is upon us.

Time For a Trend Reversal?
The reality of a "one-way" trade opportunity - which underscores the sharpness of an "inflection point" - is that they persist until they don't. I think of this as the "inflection moment," the point at which investors realize that they've ridden the trade as far as they can, meaning it's time to cash out and book their profits.

This is usually represented by a giant shift in investor sentiment. In the case of the U.S. dollar, it was the monetization of our national debt - to fund the deficit spending of the last two administrations - that destroyed the trust in the U.S. dollar. This single action, once boiled down, has carved off the U.S. dollar's buying power.

But now - with the dollar at a potential inflection point - should the Fed shift away from its currency-debasing policy, this could well prove to be the market bottom. That means the greenback will build on the early rebound move that we've already seen. Markets bottom when selling pressure abates.

At some point, the net selling pressure will abate as sellers run out of ammo, and the market switches to net buying pressure. It doesn't matter if it is FX, commodities, stocks or bonds. At the margin, trading is where real price discovery happens.

You can see the different signs showing up in different places, if you know where to look.

.Five Inflection-Point Signals
During my time as a hedge-fund manager, I discovered five indicators that, taken together, provide a pretty reliable signal that a dollar reversal - an inflection point - is at hand.

When viewed individually, these indicators aren't that significant. But when they all shift at once, it's a pretty powerful hint that a new trend is afoot - and that windfall-profit opportunities are there for the taking.

To anticipate a reversal in the current decline of the dollar, you should:

•Follow the U.S. Dollar Index (DXY): Despite its travails, the greenback remains the world's most-reliable reserve currency, which also makes it one of the very best indicators of raw market sentiment. If the index (as a proxy for the actual currency) establishes a bottom, you can bet change is afoot.
•Watch Commodity Exchange Margin Requirements: As volatility increases, something we normally see in advance of an "inflection point," exchanges will rein in risk by increasing margin requirements. As we've seen with silver - a commodity that stumbled after margin increases in recent weeks - these shifts in the regulations can have quite an impact on speculation and on prices - dampening both.
•Follow the (Big) Money: Pacific Investment Management Co. LLC's Bill Gross is the largest bond-fund manager in the world. Gross' buying or selling can get a market moving in a new direction quite easily. So when he opted to dump all his U.S. Treasury bonds recently, investors took note.
•Never Forget the Fed: When the U.S. Federal Reserve needs to change its direction, it will send out a plethora of independent Federal Reserve presidents, or governors, to reshape market expectations.
•Watch Dollar-Denominated Assets: The capital markets can be boiled down into a couple of major asset classes, which will trade either with - or against - one another. The U.S. dollar is the single-best example of this. Commodities are priced in dollars.

So let's look at each of these five in a bit more detail:

•The Dollar Index: When the dollar does start to strengthen, it will unfold over a period of months, giving you plenty of time to make your move. Commodities will be directly affected: As the dollar increases in value, the cost to purchase them should start to shrink. If you are an investor with a long-term outlook, a lot of damage can be done to your portfolio while you wait for the next commodity-bull-market-move to return.
•Commodity Margin Requirements: The Chicago Mercantile Exchange (Nasdaq: CME) changed margin rates on silver futures 10 times in the last six months or so. In early November, the CME Group's Comex Division permitted a leverage level ratio of 28-to-1 on futures contracts already held. Today, after five margin increases in silver in the last two weeks, the CME is now offering leverage of about 8-to-1. In my field, this is called "leverage compression," and it was likely one of the primary reasons that silver topped the way that it did - "spiking" up, and then down.
•Big Money Moves: PIMCO's Gross is in a unique position. He manages the world's largest bond fund, which has morphed into the world's largest mutual fund. The so-called "King of Bonds," as he was known during the "Great Bond Rally of 1983-2010," is now out of U.S. Treasuries. This is a "screaming Buy" alert to anyone who pays attention to the "big picture" in terms of top-down investing. In fact, at the end of April, the PIMCO Total Return A Fund (MUTF: PTTAX), was 4% short on U.S. Treasuries via swaps in that "world's largest bond mutual fund," according to Reuters. This extreme change in sentiment is a tacit illustration of his expectations for the direction of the U.S. Treasury yield curve over the near-term to medium-term time horizon. Historically, Gross has been great at calling inflection points in the market. The only way his trade will make sense is if the U.S. Federal Reserve makes a surprise quarter-point increase in the benchmark Federal Funds rate - which would set the stage for a long-term series of rate increases in the future. While 25 basis points is insignificant in the big picture, it is a major change in sentiment and one that would have serious implications for the future structure of the U.S. bond market.
•Never Forget the Fed: When the central bank decides to change its stance, markets will move. While hawks on the policymaking Federal Open Market Committee (FOMC) have started to sound off about a stronger U.S. dollar, this group lacks the votes, which has kept the market from fearing their comments. If and/or when the sentiment within the FOMC changes to favor an increase in rates (or even a "bias" in that direction), then all market biases will change. If you want an example, the best one to review is one from 1994, and the steady state of small, incremental increases that the market endured during the period. Stock prices were challenged, and bond values were hammered.
•Watch Dollar-Denominated Assets: If the dollar is in a downward-trading pattern, there is little reason to fear that your long commodity positions will be hurt. If the U.S. dollar changes direction, you can expect that the longer-term commodity-price trends will experience a change, too. That may not happen overnight. But "at the margin" all commodities are a "short" U.S. dollar trade, meaning they represent a bet against a rising dollar. In other words, if I am leveraged long gold, I am realistically making a leveraged short U.S. dollar trade.

Moves to Make Now
Now that we know what to look for, it's time to talk about how to profit - at least in a general sense. (Future stories in this Money Morning series, "The Inflection Point," will provide many specific dollar-rebound profit plays to help readers navigate this tricky stretch.) But for you to understand what we'll be talking about, you need an overview of the kinds of profit plays we'll be looking for and talking about.

When the U.S. dollar bottoms, you can expect to see commodities pull back in price. You can expect to see margins expand in businesses that consume high levels of raw commodities. International shipping companies should see their profit margins improve.

Investors, companies and governments around the world use U.S. dollars as their "reverse" currency. When the dollar changes direction, it impacts the economy of the whole world. In the near future, having reached this "inflection point," the dollar will change its bias direction. And when it does so, every investment or investment strategy that used to work in the global financial markets, no longer will.

Now is the time to prepare your portfolio to the coming change in bias - the inflection point. You'll be glad that you did.

[Editor's Note: There is a way for you to double your money in the next 12 months - and you don't have to hire a Swiss banker to do it.

All you need is the right blend of high-yielding investments - and the right team of financial experts.

And you can get both right here.

This amazing profit opportunity is the latest offer from the global investing gurus with our monthly affiliate, The Money Map Report.

With investors today facing as much market uncertainty as ever, the Money Map team is constantly hunting for the best investments to share with you. Those recommendations, along with our special report on how to double your money, can be yours. Click here to read more.]

Source : http://moneymorning.com/2011/05/10/...

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in