What will get me long the USD again?

I believe there are many reasons to be long the USD and personally I have been riding the USD wild bull ride for the last couple months. Yesterday, I closed my remaining USD longs as we were trading at a new 2013 high. Many of you may wonder “why” I closed my longs, and frankly, positioning in the USD seems pretty stretched as the entire market is finally becoming USD bullish, which could bring on some near term weakness. I will state that I am still very bullish the USD, and I do think (and have thought for the last 2 years) that the USD is in the process of making a very large bottom (technically) and reversing this very bearish course of the last 20+ years. But I will also explain what I will want to see in the coming days/weeks to start building a core USD long position again.

First, let me share with you some arguing points for a stronger USD of many in the market which I share:

  1. Energy Independence – One of the biggest swoons for the US economy (and the USD) would be us becoming energy independent. There is a lot of debate to whether or not this could happen, but just the mere thought of it has brought money back to US shores that have been overseas invested into BRIC countries.
  2. Interest Rates – Keep in mind that the Federal Reserve was the first central bank to ease rates post financial crisis and other central banks have been or are currently lowering rates. There has been much talk of possible “tapering” of QE in the coming months. Regardless if you feel this is even possible, the fact of the matter is most other central banks are still lowering rates or firmly entrenched in their own “QE” programs. This “interest rate differential” as investors price higher rates here, but lower elsewhere should keep upside pressure on the USD. In addition, the upward trajectory of treasury yields is another sign of USD strength as the economy here improves.
  3. Disinflationary Pressures – We are not seeing “deflation” at this point, but disinflation is real as inflationary pressures ease. Heaven forbid we actually see “deflation” because if you want to see how a G7 currency acts during deflation, just go see the JPY performance the last 30 years. I have long thought that the FOMC is more worried about deflationary pressures, and one of the main reasons for QE over the years was not only to promote liquidity and growth, but was also to ward of deflation. Don’t forget Ben Bernanke is a study of the Great Depression and the life-long effects of deflation and its impact on peoples lives.
  4. PPP – Other major currencies are still overvalued on a “purchasing power parity” basis. Commodity currencies remain some of the most overvalued currencies to the USD on a PPP basis.
  5. Commodity Super Cycle End – As austerity grips hold globally, we may be in for years of an “unwind” in commodity prices which will only continue to boost the USD.
  6. The US Economy vs. the ROW (rest of the world) – In terms of the global economy, it sure does seem that the US economy is a beacon of hope and light. As long as the economy here in the states continues to show signs of resilience compared to Europe, China and other emerging markets it should keep money coming back into USD’s.

With all these arguing points, one must wonder why I took profits on long standing USD long positions. In recent days, I have said that in the near term for the USD to continue its recent breakout higher we will need some risk aversion to kick start a more sustained USD bull run. Looking at equities, it’s hard to imagine at this point that the market will even pullback. But, this chart I posted a couple of days ago via @StockTwits you can see we are pulling away about the maximum distance from the 200DMA that we have the entire time post financial crisis. This does not mean the bull market will end here, but the risk of a pullback from current levels are rising daily.

5-16-13ES

Also, with gold approaching its recent support near 1300, and the direct inverse relationship of gold vs. the USD, one would imagine a breakdown in Gold would prompt further USD strength.

5-18-13UUPGLD

So, to sum it up, I am looking for US equities to pullback, and gold to drop below 1300 to confirm a core USD holding for myself. And to be clear, I will be nibbling long USD positions moving forward, but what I stated above will help me feel me more confident about establishing those.

One last thing I wanted to mention. It’s obvious that the USD and US equities have been moving higher in tandem. When the equity markets start a pullback, the knee jerk reaction will be to sell the USD since it has been moving higher in recent weeks with stocks. However, I do expect this dynamic to be short lived as the once hailed JPY and CHF safe havens have been taken away from us by their respective central banks (SNB and BOJ intervention). Therefore, the USD may fall initially, but I would not expect that dynamic to last. The USD still is and now may be the only option for a “safe haven” play. More than likely, that will be the USD pullback I will be looking for to establish my long positions.

5-18-13SPYUUP

5-18-13DX

Blake Morrow

Chief Currency Strategist, Wizetrade

 

Disclaimer: I have no long USD positions, but that may change within the next 72 hours of trading.

 

Follow me on Twitter or StockTwits @pipczar

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About Blake Morrow

Blake Morrow is the Chief Currency Strategist for Wizetrade. Blake has over 15 years of trading experience and has been a co- owner of a Dallas based brokerage firm and LiquidTrader Technologies. Currently, Blake does analysis daily for thousands on individual traders, also has appeared as a regular analyst on WizetradeTV, Traders Television and MBT Vision. Blake has also managed 6 figure trading accounts and is a seasoned individual investor in equities and FOREX.
  • Anonymous

    I don’t think you get enough praise pipczar. Your analysis/charts etc is phenomenal..

  • MaxxPayme

    Totally in sync with your analysis. Long Sep UUP 22 and 23 calls, looking to write near term calendar spreads (June 23′s?) with UUP at ~23.15…anticipate being able to do this next week.

  • http://www.facebook.com/katelyn.bartha Katelyn Bartha

    So, basically you are looking for 20 y $USD bull S? How bout US Debt will quadruple in 5 years it’s that’s ok with your theory? That US Debt will grow from 17 T “officially” currently to about 50 T by 2020? Is that’s also bullish for USD and bearish for GOLD?

  • Kirk

    The analysis is hopeless..long term 30 yr usd/jpy chart has a lot of factors built in. The usd weakness reflected in 30 yr usd/jpy chart is combination of plaza accord and there by JPY strength in Asian crisis & dot com bubble, whereas weakness in JPY was due to ultra loose monitory policy which can be associated with deflationary pressure.

    IN short the 30 yr chart of usd/jpy is a combination of multiple fundamental and economic events and NOT because of deflation on its own.