Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Sheffield "Mi Amigo" Memorial Fly Past at 8.45am on 22nd Feb 2019 - 20th Feb 19
Here’s The Real Reason You Stress About Money - 20th Feb 19
Five Online Marketing Predictions that will Matter in 2019 - 20th Feb 19
Has Gold Price Reached Upside Resistance Near $1340-1360? - 20th Feb 19
So Many Things are Not Confirming Stock Market Rally - 20th Feb 19
Forex Trading Management: The Importance of Being Prepared - 19th Feb 19
Gold Stocks are Following This Historical Template - 19th Feb 19
Here’s Why The Left’s New Economic Policies Are Just Stupid - 19th Feb 19
Should We Declare Emergency for Gold? - 19th Feb 19
Why Stock Traders Must Stay Optimistically Cautious Going Forward - 19th Feb 19
The Corporate Debt Bubble Is Strikingly Similar to the Subprime Mortgage Bubble - 18th Feb 19
Stacking The Next QE On Top Of A $4 Trillion Fed Floor - 18th Feb 19
Get ready for the Stock Market Breakout Pattern Setup II - 18th Feb 19
It's Blue Skies For The Stock Market As Far As The Eye Can See - 18th Feb 19
Stock Market Correction is Due - 18th Feb 19
Iran's Death Spiral -- 40 Years And Counting - 17 Feb 19
Venezuela's Opposition Is Playing With Fire - 17 Feb 19
Fed Chairman Deceives; Precious Metals Mine Supply Threatened - 17 Feb 19
After 8 Terrific Weeks for Stocks, What’s Next? - 16th Feb 19
My Favorite Real Estate Strategies: Rent to Live, Buy to Rent - 16th Feb 19
Schumer & Sanders Want One Thing: Your Money - 16th Feb 19
What Could Happen When the Stock Markets Correct Next - 16th Feb 19
Bitcoin Your Best Opportunity Outside of Stocks - 16th Feb 19
Olympus TG-5 Tough Camera Under SEA Water Test - 16th Feb 19
"Mi Amigo" Sheffield Bomber Crash Memorial Site Fly-past on 22nd February 2019 VR360 - 16th Feb 19
Plunging Inventories have Zinc Bulls Ready to Run - 15th Feb 19
Gold Stocks Mega Mergers Are Bad for Shareholders - 15th Feb 19
Retail Sales Crash! It’s 2008 All Over Again for Stock Market and Economy! - 15th Feb 19
Is Gold Market 2019 Like 2016? - 15th Feb 19
Virgin Media's Increasingly Unreliable Broadband Service - 15th Feb 19
2019 Starting to Shine But is it a Long Con for Stock Investors? - 15th Feb 19
Gold is on the Verge of a Bull-run and Here's Why - 15th Feb 19

Market Oracle FREE Newsletter

The Real Secret for Successful Trading

Where the U.S. Dollar Will Go Next

Currencies / US Dollar Jun 29, 2018 - 01:41 PM GMT

By: Troy_Bombardia

Currencies

For a long time I said that “Money Flow” determines a currency pair’s direction. But I’ve never been able to quantify that concept using an indicator. I’ve tried various things over the years: inflation differentials, interest rate differentials, etc. All of these were commonly accepted theories but were disproven in the light of historical data.

From Ed Yardeni’s book “Predicting the Markets”, we can now quantify the idea behind Money Flow:

On a 12 month basis, the United States has been running widening trade deficits for decades. The trade deficit of the U.S. must equal the trade surplus of the rest of the world. So the 12 month change of non-gold international reserves held by all central banks (excluding the Federal Reserve) minus the trade surplus of the rest of the world should be a proxy for capital inflows (and outflows) to the rest of the world from the U.S.


*FYI, I highly recommend Yardeni’s book. It’s definitely the best book out there for macro traders and investors.

This is Ed Yardeni’s way of calculating international capital flows. And it works. It has a very strong correlation with the 12 month percent change in the U.S. Dollar. This suggests that the U.S. Dollar is more sensitive to capital flows than trade flows (capital flows tend to be more volatile, trade flows tend to be more persistent and slow moving).

Ed uses a trade-weighted U.S. Dollar Index, which is better than the USD Index.

Since the trade-weighted dollar is more sensitive to capital flows than trade flows, the USD also has a very strong correlation to the 12 month change in capital flows (both absolute, and in percentage)

An even better measure is overlapping the 12 month PERCENTAGE of non-gold international reserves vs. the 12 month change in the U.S. Dollar (inverted).

Conclusion

As you can see, the 12 month PERCENTAGE of non-gold international reserves and the 12 month change in the U.S. Dollar (inverted) tend to move in the same direction.

This means that money flowing to the rest of the world is bearish for the U.S. Dollar, and money flowing to the U.S. is bullish for the U.S. Dollar.

You can see that the data on non-gold international reserves lags by 2 months. Hence, the 12 month percentage change in non-gold international reserves is not always a leading indicator for the 12 month change in the U.S. Dollar.

However, these 2 data series do move together in the medium and long term. This means that:

  1. Non-gold international reserves cannot be used to pick turning points in the U.S. Dollar’s trend. However,
  2. Non-gold international reserves can be used to confirm the U.S. Dollar’s current trend (i.e. a trend following indicator).

Right now

Non-gold international reserves are starting to flatten. This suggests that the U.S. Dollar will start to flatten and will most likely swing sideways in a wide range.

A big USD bull market or bear market is unlikely right now because the 12 month percentage change in non-gold international reserves is flattening.

With that being said, the elephant in the room are Trump’s tariffs. If Trump’s tariffs cause world trade to decline significantly, then that is a medium-long term bullish factor for the U.S. Dollar because it’ll cause non-gold international reserves to decline.

At the moment, Trump’s tariffs have not had a significant impact on world trade.

Click here to see other trading models.

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 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

6 Critical Money Making Rules