The dollar approached critical support last week and neatly bounced just as I had hoped and expected.
However, as I examine the technical prospects for an extended rally, I cannot shake a resurgent sense of bearishness about the dollar. The daily chart shows some pretty tough overhead resistance awaits any further rally in the dollar: the 50-day moving average (DMA), 200DMA, and even the twin peaks from November and January.
Sure long-dated interest rates have nudged higher, economic data have printed relatively strong numbers overall, and corporate earnings are still hitting on all cylinders. But perhaps, the current wrangling in Washington D.C. over the budget will provide a catalyst to finally push the dollar below support. Maybe it will simply be the lack of anything to worry about to support “safe haven” buying. It is difficult to guess what might break the dollar’s support. However, I see commodity prices continuing to surge despite the dollar’s current refusal to budge. Silver is reaching for fresh multi-year highs and even gold has started creeping upward again. These signals encourage me to bet that the odds are increasing for a fresh bout of dollar weakness sooner than later.
(On the flip side, if the dollar manages to cut through all this resistance, I will be forced to readjust!)
*All charts created using TeleChart:
Moreover, rising input costs are squeezing more and more companies and encouraging more and more companies to consider and implement price hikes. I have tried to track many of these pressures since late 2009 in “Inflation Watch.” I last wrote about how companies are struggling to cope with destabilizing coffee prices. An article in Monday’s New York Times titled “Companies Raise Prices as Commodity Costs Jump” is yet one more confirmation that the move to a more inflationary environment is already underway.
In the face of these pressures, I see a Federal Reserve that is still largely worried about deflation because of the slack in employment and housing. I have long believed that the Federal Reserve will be slow and even unable to act in the face of percolating inflationary pressures. We are not quite there yet (according to official government numbers anyway), but the dollar’s value will erode ever faster as inflationary pressures rise, and the Federal Reserve stands firm on near-zero rates (and more currency printing) out of fear it could squash the economic recovery in its tracks by moving one inch on rates (the Bank of England has already reached this point of discomfort!).
As always, time will tell, but under the circumstances, I prefer to continue to bet on future inflation.
The CNBC video below tackles the debate on “when Federal Reserve chairman Ben Bernanke will see inflation”: Steve Liesman looks at the core vs headline inflation data to argue there is no inflation problem; Michelle Girard argues the Fed is overly focused on the output gap while companies across the board are planning price hikes; Rick Santelli notes that hedging against inflation risks is getting much more expensive.
Be careful out there!
Full disclosure: net short the U.S. dollar; long GG, PAAS, TBT, TIP