Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 





As we outlined in this month’s UnderTheLens video we expect structural weakness in the US$ over the next 9-18 months based on relative strength in the Chinese Yuan, the EURO and the USMCA partners (Canadian Dollar and Mexican Peso).  Recently a weak US$ has powered precious metals due to a number of factors including the debasement of the US currency via an unprecedented Regime Change in US monetary & fiscal policy.
We have already seen the dollar falling almost across the board, reaching a two-year low against a basket of currencies at 93.416 before recovering to 93.975.The US$ is down 9% from its Match 2020 highs and is on tract for its worst month since 2011. Meanwhile, the euro dropped back to $1.1710 after rising to its highest in two years at $1.1781. The dollar also fell to a four-month low of 105.10 against the Japanese yen before last trading at 105.57. The EURO and Yen strength are two of relative strengths we outlined in this month’s video as pre-requisite structural trends for a falling US$.
What is clear is that the pending $1.2 TRILLION PLUS (the House controlled Democrats want $3.2T!) fiscal spending bill soon to come out of the US Congress will increase the money supply dramatically. That fact is likely to keep the US money supply growing at a faster rate than Eurozone money supply, even with the recent Eurozone stimulus announcement. The relative money supply growth between the US and Eurozone has been a good coincident indicator of the US dollar index, since that index is weighted nearly 60% towards the euro. As of this writing the US dollar index is trading at multi-year lows. The likely $1.5T- $2T compromised stimulus plan will also serve to widen the US government’s budget deficit even further, possibly to 20% of GDP. 
The US budget deficit as a percent of GDP is highly correlated with the level of the US 
dollar index. The possibility of more than transitory US dollar weakness appears to be growing and we can say with at least a decent level of confidence that the stimulus round in the offing is further US dollar bearish.
What would it mean for stock market leadership if the US dollar does truly and meaningfully depreciate near term? It would most likely spell the end of technology leadership and usher in leadership of a different, forgotten group: that of materials.
The chart below (Addendum #3) overlays the US dollar index (blue, right, inverted) against the relative performance of materials vs technology (red line, left). A falling US dollar is highly correlated with materials companies outperforming technology companies. We’re seeing a very, very slight turn in the relative performance differential. Is it the beginning of a new trend or yet another false start?
An important pattern we have witnessed is how economies linked most tightly to China – including commodity producers as diverse as Australia, Chile and Brazil – have tended to perform better than economies most directly linked to the U.S., notably its NAFTA trading partners. These are the structural trends we expect to continue with the exception of Canada which will be seen to be more and more as a Commdoll” (Commodity Dollar Country).


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