Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 





There has been a distinct shift in the perception of traders regarding the US Dollar. It may presently be an opportunity for longer term investors, at least until the annual Economic Policy Symposium at Jackson Hole in August.
In our last newsletter we showed how the US Twin Deficits directly reflect the intermediate to longer term direction of the US dollar. It is clearly signaling a downward direction, yet the dollar is rising with worsening inflation and growth expectations. What is going on here?

The US Dollar was recently approaching its major long term support line. It has subsequently reversed, catching many traders with large dollar short positions. We are experiencing a classic short squeeze!


  1. What is driving it, and
  2. Will it continue?

The US dollar has most recently been trading sideways which has established a steady base from which the DXY is trying to rally from. Last week, we were looking at trend-line resistance from September (shown by a descending red trend line on the chart directly above and below right), but that has now been cleared. Given the healthy length of time the DXY has been consolidating and the trend-line it is climbing above, a rally to the yearly high at 93.43 is likely.

If the current rally fails it doesn’t necessarily mean the dollar is doomed for lower prices. But it will need to get into gear again and close into fresh multi-month high territory to reignite a bullish bias. A failure to stay in breakout territory above resistance is seen at the moment as a low probability scenario.


But there is more going on than just this.

According to data from the Commodity Futures Trading Commission, who track the futures market, bullish wagers on the dollar have jumped sharply this month (as shown below). The net long position of speculative investors on the dollar index — which tracks the US currency against a basket of rivals — has reached its highest level in more than a year at 11,257 contracts. A net long position marks the difference between positive and negative bets. CFTC figures also show speculators — groups such as hedge funds that bet on currencies — are growing more positive on the dollar’s prospects against the euro, the British pound and the yen. While futures make up only a small part of the $6.6tn-a-day foreign exchange market, they provide an important and timely proxy of investor sentiment.

QUESTION: What has prompted this?


ECB Chief Christine Lagarde delivered her much anticipated new monetary for Euro Monetary Policy on Thursday July 8th. As the folks at the Mises Institute wrote: “Old, absurd, and unfit for purpose!

The ECB’s New Inflation Plan Is Like the Old Plan. But Worse!

The ECB has adopted many new radical tools to make this happen. Following on from the 2 per cent statement, the ECB confirms the setting of interest rates remains the primary tool, but many other tools are available as well: “The Governing Council also confirmed that the set of ECB interest rates remains the primary monetary policy instrument. Other instruments, such as forward guidance, asset purchases and longer-term refinancing operations, that over the past decade have helped mitigate the limitations generated by the lower bound on nominal interest rates, will remain an integral part of the ECB’s toolkit, to be used as appropriate”.

In other words, the new plan tells us the ECB plans to be much more activist and it plans to use many “tools” that were once considered to be unacceptably radical.

Without boring you with the details, the conclusion is that it means a dovish ECB and elevated risk aversion which could send the EUR/USD pair even lower while providing support to other cyclical currencies. The bank has previously announced that the PEPP will run at least to March 2022 and adopted a new inflation target from “below, but close to 2%” to “2%”, which, itself, somewhat dampened expectations of earlier policy normalization. This all lends itself to more upward pressure on the US Dollar.


We have been calling for $94 on a dollar counter rally since the beginning of the year. We only recently modified it to 93.9 when we achieved the late March high. This last leg is a potential trade opportunity but it will soon have run its course.

In our view the window is likely to close with the August Jackson Hole monetary brain-fest and the parallel occurring Debt Ceiling Congressional debacle!

As Deutsche Bank’s head of FX research George Saravelos recently outlined:

What presently matters most for the USD is not long-end yields but Fed lift-off and front-end rates. By the Fed recently reducing its commitment to the “transitory” inflation narrative, it weakened implicit calendar-based guidance and has allowed the market to price in greater rate hikes in coming years. If market pricing is correct and the Fed lifts off in 2022, we will revert to a pre-COVID world of exceptionally flat curves and a strong USD. In a low r* world even small changes to rates attract large (unhedged) inflows similar to the 2015-19 period. The EUR/USD could drop all the way back down to 1.10.

Ultimately though, it boils down to what regime we are in:

    • If, in contrast, the back end of the curve is correct in its growth and inflation pessimism, it is unlikely that Fed hikes get realized and we revert to a weaker dollar.
    • However with a delayed/slow lift-off, our bias is for a weaker dollar to eventually return.


Wells Unexpectedly Shuts All Existing Personal Lines Of Credit, Hinting US Economy On The Edge

Wells Fargo just announced that it’s shutting down all of its existing personal lines of credit – a popular product offered by the retail-focused Wall Street giant – a move that will likely infuriate legions of customers.

The revolving credit lines, which will be shut down in the coming weeks, typically allow users borrow $3K to $100K, were pitched as a way to consolidate higher-interest credit-card debt, pay for home renovations or avoid overdraft fees on checking accounts attached to the loan.

Customers have been given a 60-day notice that their accounts will be shuttered, and remaining balances will require regular minimum payments, according to the statement.



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