Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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.


© 2005-2022 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