Weekend Daily: The Perfect Storm – U.S. Dollar, Inflation and Precious Metals

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According to recent PPI and CPI prints, inflation has plateaued. Some analysts will argue that inflation has hit its zenith. However, what if one of the next catalysts to even higher inflation is spurred by the potential and recent peak in the U.S. dollar?

Looking at the price chart of the inverse ETF to the Dollar or the Invesco DB US Dollar Index Bearish Fund, the U.S. Dollar is losing steam. As momentum often proceeds price, our Real Motion indicator certainly points in the direction of a dollar price peak.

The U.S. Dollar has been on a tear in recent months, bringing it to its highest valuation versus other major developed currencies for decades. The dollar strength has begun to eat into profit and revenue margins for U.S. large-cap stocks, not to mention the havoc dollar strength has caused in commodity markets, developed, and developing economies, and country stock market indexes worldwide.

With Bank of England, Japan and China all trying to add liquidity to help stop the bleed of their currencies, could that bring the U.S. dollar down further?  

What are some implications to your investing if this scenario plays out?

The U.S. dollar changing course will have profound effects on commodity prices and cascading outcomes throughout global equity and bond markets.

One such implication will be on precious metals. Gold and silver are steadily confirming signs of a new mini-rally at the same time as the US dollar retreats from recent historic highs. The above chart shows that the US has been selling gold reserves while some other countries have bought in record amounts. Silver found a bottom in early September. Gold could be forming a double bottom.

Food prices have barely budged from their highs, particularly when you look at where they were pre-pandemic.

US dollar bearishness points to a monumental global shift and will play into commodity price strength, most likely visible first in precious metal prices. And although, initially, a dollar drop could be good for equities, caution is still warranted. 

In the face of the dollar declining in price and momentum, our yields are still rising. There have been increasing calls for the Fed to pause hikes to allow the economy time to absorb previous ones, but most Fed members seem unfazed by this rhetoric.

We are not expecting a pause from the Fed anytime soon, but we do expect the US dollar to peak before the Fed raises rates next month. This puts the credibility of the Fed’s monetary policy in further question.

If yields are rising, equities fall or stagnate, yet the dollar drops, and commodities rise, yes, that equals more inflation and a real conundrum for the Fed and the U.S. government regardless of the outcome of the mid-term elections.

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Mish in the Media

Mish discusses why the U.S. dollar might be one of the most important lead indicators in this appearance on Benzinga.

Given mixed data, fear and strong earnings, the charts are the best indicators for the future of the economy, as Mish Schneider explains in this Yahoo! Finance appearance.

See Mish explain why Bond traders buy bad company stocks on Business First AM.

Read Mish’s latest article for CMC Markets, titled “Are Long-Term Treasuries Oversold?.

Has the market bottomed? Where should passive investors go to be safe? Mish digs into these questions and more on Coast to Coast with Neil Cavuto.

Mish and Scott discuss a possible soft landing but with loads of headwinds to watch for on RFD-TV’s Cow Guy Close.

With BNN Bloomberg, Mish discusses the markets as U.S. banks reported earnings and why it’s important to watch long-term bonds and the stability investing in the sugar trade.

The 6-7 year business cycle in the “inside” sectors of the U.S. economy is facing a huge test, as Mish discusses on NASDAQ Talks.

Watch some select clips from Mish at ChartCon 2022!

Mish and Nicole talk risk, inflation, long bonds, dollar and where you can park some money on TD Ameritrade.


ETF Summary

  • S&P 500 (SPY): Still 360 pivotal support and resistance at 380. 362 caution; 360, 351, 340; potential upside levels: 380, 385, 390.
  • Russell 2000 (IWM): 170 support, 177 resistance.
  • Dow Jones (DIA): 306 was resistance and is now support; 314 resistance.
  • Nasdaq (QQQ): 275 was previous resistance; 270 support, 278 resistance.
  • Regional banks (KRE): 58.60 support, 62 resistance.
  • Semiconductors (SMH): Support at 181, resistance at 190.
  • Transportation (IYT): Support at 198, 205 resistance.
  • Biotechnology (IBB): Still holding 115 support, 122 resistance. 
  • Retail (XRT): Still holding long-term support at 55 and resistance at 62.

Mish Schneider

MarketGauge.com

Director of Trading Research and Education

Wade Dawson

MarketGauge.com

Portfolio Manager

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