The US dollar could surprise with a massive rally

Hoard cash. There will be plenty of time and opportunity at far lower levels, warns Sonali Ranade in her weekly Market Notes

Commodity markets have been marking time, waiting for the equity markets to complete their rallies before they make up their mind. The currency markets are clearly anticipating a market sell-off in equities that sends dollars racing back to the safe harbour of US treasuries. If the scenario comes about, a huge robust dollar rally will force every other market to find its new level in relation to it. That also means that commodity markets will finally show us their final support. Those sitting on cash will have ample opportunity to stock up the best goodies. So don’t be afraid of cash no matter what the pundits tell you about negative real interest rates.

A surging dollar will put extraordinary pressure on RBI and the INR. The RBI may be prepared to battle on till DXY gets to 85 but I suspect the true target is 89. Not sure what the RBI’s reaction to $-INR at 70 will be. The RBI had ample warnings of the fiscal and CAD deterioration. It had also ample warning about the INR being over-valued. Instead of actively making markets and guiding them higher or lower to effect smooth change, it slept and then woke up in a panic. The RBI must understand that markets are always made, they do not just happen. If the RBI will not do it some other foreign bank cartel will. The only difference is that the cartel works for its own profit and the RBI loses control over the market. So please learn to make markets; and money. The days of central banking by administrative fiat are over. Dead. Gone.

The Nifty is delicately poised on the neckline of a large inverted S-H-S with a target of 5000 from the neckline of 5600. That’s the good news. The bad news is that there is no rule which says the fall will stop at the target. All it says is a bounce then results. There could a short bounce before the neckline is breached to the 200 DMA area. But in all other respects the Nifty has decided not to wait for world markets to tank.

Hoard cash. There will be plenty of time and opportunity at far lower levels than these.

Gold:  The yellow metal turned down from the overhead resistance at $1350 and closed the week $1310.50. Gold hasn’t retested its new support at $1170. Furthermore, wave counts favour a retest of the 1150 price zone before a tradeable rally ensues. My sense is that, barring minor pull-backs from time to time, gold will drift towards $1150 by the middle of September.

That should give the RBI some breathing time in managing gold flows into India.

Silver: The metal pulled back on Friday from a low of $19.185 to close the week at $19.912. As discussed last week, silver is yet to find a credible area of support and my sense is that it will hit the $17 area by end of August. I don’t think that would be the end of silver’s bear market though we may get a rally of sorts from that area.

HG Copper:  As expected copper continued to consolidate within a trading range above its recent low of 2.98 and the overhead resistance at 3.20. There may be a change of bias over the next few weeks from up to down but expect copper to tread in the same trading range for some time more.

Brent:  Switching over from tracking WTI to Brent from this week. Of the two, Brent provides a clearer picture of the international price movements without getting overwhelmed by temporary pipeline logistics in the US domestic market.

The basic wave counts haven’t changed because of the switch-over though quite a few the “anomalies” in prices have got ironed out. Brent, as WTI Crude, is in counter-trend rally from the low formed in June 2012 and that cycle appears to be coming to an end in August. The extent of the next leg down will tell us if the correction in crude prices is over or there is some more consolidation ahead.

Brent could shoot for $120 over the first two weeks of August before turning down for a correction. The structure and extent of the next correction will tell us where Brent is headed over the medium term. Exit at rallies.

US Dollar [DXY]: The DXY closed the week 81.978 after bouncing off its 200 DMA at 81.59. The correction in the DXY from the top of 85 is almost over barring a retest of 81.50 before the next rally back to the 85 region and possibly beyond that.

Since this piece is all about technicals, I won’t venture into discussing the expected correction in equities, the consequent sell-off and search for yields in the US bond markets. But one thing is clear. A positive real yield in bonds, backed by some GDP growth, is available only in the US and that’s gonna make inflows in dollar assets a given.

A resurgent dollar will rip through commodity markets, and equities of course. Nothing will be left untouched. So the question is, will the rally extend beyond 85? My sense is yes, given the extent of correction we saw in wave 4 that is just ending. Humongous volatility ahead.

EURUSD:  The EurUsd rally from the recent bottom of 1.27540 was completed at 1.3300 and we may be headed back to a retest of 1.27 by the end of September.

The pair closed the week 1.32810. The descent to 1.27 will be paced by the DXY and the extent of sell-off that we see in Europe. Likely to be a very volatile trip down with vicious counter-trend rallies.

USDJPY:  The UsdJpy closed the week at 98.93. Having made a low of 97.67 the pair is now headed up with a first target of 101.50 followed by another overhead resistance of 103.65. My sense is the pair will follow the DXY up over the next two months.

USDINR:  The $-INR corrected down from the top of 61.21 as expected towards the INR 59 area, making a low of 58.68 during the week. The pair’s 50 DMA is at 58.65. Bouncing of the 50 DMA the pair was back to 61 in double quick time, closing the week at 61.09.

We could have another leg of a correction down to the 59 area from 61 over the next few days but the major trend remains up and a target of 62.50 looks close at hand.

The $-INR cannot remain immune to the strengthening the overseas dollar where I expect the DXY to rally from 81 to 85 [an up move of five per cent]. That makes for a $-INR of 64 just [based on a buy in Singapore and sell in Mumbai model.] Of course, the reality is much more complex and some of the move from 81 to 85 is already in the price. Even so, expect an correction to be short and fleeting while the $ trends up to test new highs.

The RBI’s real problems will begin if the US equity markets tip into a deeper correction than 10 pc and the DXY shoots beyond 85 to 87 or even 89. The 87-89 is not ruled out. If you remember, I had set my target for DXY for this full rally from 72 ay 89. And that appears well within reach.

The RBI’s trading restrictions may help it manage the politics but the consequences for its credibility as a central banker are not worth contemplating. The RBI was sleeping at the helm.

German DAX:  No surprises from the index. It is proceeding in a very orderly fashion towards its target of 8545 which it should hit by Friday. The probability of a substantially higher high than 8550 is rather slim though always there. But it is unlikely to be so high that it rules out an intermediate correction as explained before. Execute exit plans and wait for the next correction to unfold and set direction.

NIKKEI 225: The Nikkei bounced up from its 50 DMA in the 13500 area and closed the week at 14466.16. The bounce is unlikely to last though it could stretch upwards 15500 as Nikkei plays catch up to the rally in US markets for the next week.

To my mind, Nikkei remains in a downtrend from the top of 16000 and the downside target, in tandem with other world markets, could be well below 11500. So the next rally in Nikkei is best watched from the sidelines.

NASDAQ thru QQQ:  QQQ [Techs in Nasdaq] pulled no surprises and proceeded in a an orderly fashion to the target zone of $78. The uptrend has another week or 10 days to exhaust itself. The possibility of an overshoot beyond $78 exists but many key technology stocks are already into an intermediate correction following below expectation results. So yes, we could overshoot but not by much.

And if QQQ just meets the target or is marginally higher the probability of the following correction being deep enough to tip the market into an intermediate correction is very high. Exit and move to the sidelines. Avoid shorts till we are close to August 16 or we clearly have a top in place.

S&P 500 or SPY:  Like QQQ, the SPY showed no surprises moving towards its target in an orderly fashion. Price versus volume divergences on both QQQ and SPY are pronounced but something you would expect at an impending top. The SPY has a target of 175. It closed the week at 170.95. Clearly a long way to go with about two weeks to get there. The index is not even very overbought at this point.

Could the SPY at $175 or better obviate the need for a longer term intermediate correction? It is a close call. The SPY tanked from a high of 165.55 in the last correction to a low of 156 or 9.55 points. On the other hand, it has added only four points to the top of the previous rally and could add another five before it pauses for a correction. So we have nine down - nine up. Too close to call at this point.

Shorts not advised at this point but overall exit all long positions before August 16 and wait patiently for a correction to sort out the market direction.

NSE NIFTY: The Nifty was the real surprise of the week. First, it failed to make for the top of its trading range at 6240, stopping well short of it at 6065. Next on the way down, it took out both its 50 and 200 DMAs without a pause. Lastly the three recent tops at 6075, 6200 and 6075 look like inverted S-H-S with a neckline 5650. The Index itself closed the week at 5677.90, more or less at the neckline. That’s a pretty unusual run of events and the prognosis can’t be encouraging for bulls.

In the normal course, I would expect a respectable pullback from the neckline at 5650 to the 200 DMA before taking another shy at the neckline. I don’t think the neckline will hold for long and that gives the Nifty a target of 5000. That would also more or less complete the correction in Nifty in tandem with the world markets. Of course the process will take time.

NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and no one should rely on them for any investment decisions.

Sonali Ranade is a trader in the international markets