That’s why I bet against the U.S. dollar going into last week’s Fed announcement. That’s also why I’m betting against rising yields by betting on U.S. Treasuries.
That’s partly why I think gold has higher to go from here.
But I want this to be more than an “I told you so.” (Really!)
Here is one chart that gives me confidence in this narrative — that the Fed’s rate hike and normalization trajectory is priced into many asset classes:
That’s the Commitments of Traders in Eurodollar futures.
Eurodollars are not the same as the Euro/Dollar exchange rate. The latter is a currency pair; the former is a measure of interest paid on U.S. dollar reserves deposited in banks outside the U.S. banking system.
The fact that large speculators are extremely bearish on Eurodollar futures suggests they are extremely bullish on U.S. interest rates. Extremely.
So, let’s follow the rate path …
Now using the euro currency as an example, expectations for rising U.S. yields have kept the U.S. dollar strong. But relative to the euro, the U.S. dollar looks vulnerable to losing some more value.
This chart of EUR/USD shows the direction of the euro. When the price of the euro goes up, the dollar goes down. And vice versa.
After notable strength following the FOMC announcement, I think the euro is going to keep going up.
Drawn on that chart, among other things, is what’s called a Fibonacci arc. It measures both the magnitude and duration of the current wave, relative to the previous wave.
Overlaid on a Fibonacci extension, the arc gives us a pretty clear target to work with: $1.0950 on April 7.
Now who in their right mind is going to give you a target price and a target date?
Me, I guess.
That’s based on my expectations for a third wave to fully extend 100% of the first wave. But — and to hedge my bets — I’m not opposed to a greater than 100% extension. EUR/USD could very easily extend 161.8% of its first-wave rally, finishing it up on or around May 5.
And it might have to.
So stocks have time to finish their craziness.
After all, the “dovish” interest-rate hike from the Fed last week seems to have excited stock market bulls. They inferred from the announcement that the Fed’s path to normalization won’t be steep enough to send economic activity and/or risk appetite stumbling.
Related story: The Market Loves the Goldilocks Fed
But that’s not exactly the message the Fed wants to send.
I haven’t sat down with any Fed board members, well, ever … but they’ve got to have dislocation on the mind.
They’ve got to be worried they’re not being hawkish enough to keep asset price inflation from triggering bubblicious risks to the financial system and the economy.
On Feb. 20, when I wrote “Let Your Faith Be Bigger than Your Fear,” I suggested the stock market has another 7% to climb before the long-term bull market is seriously threatened.
Surely that kind of rally would scare the Fed to death. Especially if it happens within the next two months.
Seems possible. And it sure would fit nicely with what the Fibonacci levels suggest are reasonable targets.
Oh, by the way, if the Fed did need to “make a statement” to arrest dislocation in asset markets, its next FOMC meeting is May 2-3.
Maybe, instead of April 7, that’s the week this dovish hawk dies in the bloodied talons of a hawkish hawk.
If the euro rallies to $1.0950 and U.S. stocks climb roughly 7% by May 5, you can bet interest-rate expectations will shift. And they could do so in such a way that boost the value of the U.S. dollar and jeopardize the future of the U.S. stock market bull.
OK, I’m getting down off my crystal ball. For now!
The SPDR S&P 500 ETF Trust (NYSE:SPY) was trading at $236.86 per share on Monday morning, down $0.17 (-0.07%). Year-to-date, SPY has gained 5.96%, versus a % rise in the benchmark S&P 500 index during the same period.
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