Coming to a Head


POT IS BREWING - Just a heads up that we are into the final week of summer and many out there are off the desks. As always, this doesn't mean the market is going to be quiet, but it does mean that whatever is going on out there needs to be taken with a grain of salt. I have been mostly taking the time to spend with the family and recharge for the last quarter. I think it is going to be a wild one, with so much going on out there and with all of the things we've been seeing in 2018 coming to a head. We've got central banks that have moved into policy normalization at a time when they are being forced to either try to stay on hold longer or move as slowly as possible with rate increases due to an economic backdrop that is not inviting of higher rates. We've got Brexit uncertainty and emerging market stress. We've also got the big one, which is the US administration's policies and whether or not they will end up doing what they are intended to do.

aug 28 shot

NOT SO CRIMINAL - As I've been highlighting, none of this makes for an attractive risk environment, which makes the ongoing bid in stocks that much more unsettling. This has been a move that has been going on for a decade, and although I tried in 2017 to hold onto a short, paying the price for it, the fact that it's been a decade makes the timing a little less criminal, especially if we see something play out this year or early next. Many times, the most pronounced move in a trend is right at the end. This looks to be that one more big 'go for it,' before it all fizzles out and comes crashing down. This is where we are at with stocks now. The idea of the stock market continuing to move to record highs without even the most modest of pullbacks (20% is modest given the move we've seen and the fact that it was artificial support), is just not something that is realistic in any way. Yes...it's been hard to try and call a top. But to not expect one? That's absurd.

A lot of major uncertainties out there and all of them look to be building to a climax in the weeks and months ahead.

A DIFFERENT DOLLAR - How this translates in the currency market should be interesting. Normally, I would have been arguing for Dollar strength as risk comes off, but I am no longer leaning that way. I think risk off Dollar off will be the way things move,** at least as far as the Dollar against the major currencies goes**. So basically, I see a market that is buying the other major currencies aggressively as risk comes off. Maybe the US Dollar benefits against the other currencies, but against the majors, I suspect there will be a strong desire to be wanting to diversify away from the Buck. Why? Well - because this is what the US administration wants. The US administration wants to see the US Dollar weaker and can make it happen by continuing to push forward with tariffs that make it less attractive for exporters to the US. This means the US is consuming less abroad and by extension the ratio between what the US imports and what it exports tightens up. The tightening up of that ratio means a reduction in the deficit. Whatever you want to say about the administration, there is nothing wrong with wanting to pay down the US deficit.

UNDER PROTEST - Still, there are many who oppose such policy and many who are worried about fallout from such measures. One of those people worried is Jerome Powell and his worry has been expressed so far as to say that if the US administration pushes forward, the Fed will need to reconsider its policy timeline, which means the Fed will need to be less hawkish with its path and look to hike rates less than what it has been projecting. If this happens, a US Dollar that had been benefiting from yield differential advantage, will no longer draw such benefit. So this is where I see things headed into Q4 and through 2019 and this is how I would like to be positioning. I haven't been able to get back into anything just yet, but I am looking to get involved and will be waiting to see if the opportunity presents.


Subtle But Important Changes

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