In this week’s Dirty Dozen [CHART PACK] we look at the US dollar from several different angles and conclude a massive expansionary regime is coming, plus more… 

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"At any moment of time there are myriads of feedback loops at work, some of which are positive, others negative. They interact with each other, producing the irregular price patterns that prevail most of the time; but on the rare occasions that bubbles develop to their full potential, they tend to overshadow all other influences.” ~ George Soros

1. The US trade-weighted dollar index is in a 2-year sideways compression regime. Despite the greatly exaggerated reports of its death as a reserve currency, it continues to stairstep higher in a larger 17-year uptrend. 

2. We’ve been writing about the major long-term compression regimes we’re seeing develop (ie, oil, AUD, CAD, EUR, CNH). Here’s a chart showing the monthly Bollinger Bandwidth of the DXY going back to the mid-70s. 

The DXY has only been in a tighter squeeze three other times over the past 50 years. Each other instance preceded a sizable trend. 

Remember, compression regimes are directionally agnostic. They just mean a BIG trend is coming.

3. For those interested, here’s how George Soros analyzes the currency market. 

4. Speculative flows seek out the highest risk-adjusted total returns. This is why DM FX pairs tend to track relative market returns over time. Below is the MSCI US equity index versus MSCI World ex. US returns (white line) and the DXY in orange. 

Going off this chart alone we’d expect the dollar (orange line) to soon turn up and begin trending higher again. 

 
5. But perhaps SPX vs Gold (white line) is a better signal this time. You can see a clear lead in this relative performance with that of the DXY at key turning points. It’s been consolidating sideways for 3-years now. Time will tell which way it breaks but we should expect the dollar to follow suit when it does.

6. USD is likely to remain in its uptrend until this long Core Domination or Benign Cycle comes to an end… And it’s going to take a classic turn of the business cycle (ie, a feedback loop of rising unemployment) to do it. 

7. Here’s US vs EU relative GDP forecasts over the past few years. The latest 2024 forecast is marked in blue. Capital seeks the highest return and higher returns are often found in countries with higher growth rates. The current relative GDP forecast would favor a breakout to the upside in the dollar soon. 

8. But one increasingly large headwind for the dollar is that the US market is very expensive. The chart below shows the relative PE ratio of US equities versus the rest of the world. Current valuations are 1.6std above their 30-year average. At some point, this will matter. 

9. The euro comprises roughly 60% of the DXY basket so what it’s doing matters. Here’s our yield spread and yield oscillator chart of EURUSD. Yield momentum is starting to turn up in the euro’s favor while nominal spreads remain quite negative. 

10.  Our sentiment model for DXY is at bearish extremes that historically mark major lows in the dollar. 

11. If the DXY is going to kickstart a new bull leg then we should see it start to move soon. The macro environment is shaping up to be a very supportive one for dollar strength. We have growing political risk in Europe, war in the Middle East, and a struggling China that’s at an increasing risk of having to devalue the yuan. 

Failure to make a sustainable move to the upside soon will be a signal in and of itself.

 
12. This is surprising… Despite what looks like the start of a parabolic trend in Qs and SPY, our Trifecta Lens model which is a composite of liquidity, sentiment/positioning, and technicals, is nearing triggering a major buy signal. We’ll see if it gets there but if it does, then the latter half of this year is going to be interesting.

Thanks for reading.

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