Below is a copy of this week’s free eLetter that went out this morning.
Goldilocks Ends & ‘Currency Wars’ Begin
Amid continuing inflationary policy, the US Dollar is at a critical
juncture by both daily and weekly charts. Euro targets 142+ and the Yen
approaches our target. Currency war kicks off; gold just sits there
From last week’s eLetter:
“A Goldilocks atmosphere was expertly created in large part due
to the fact that Operation Twist (yes, we are still dealing with its
effects) by its very definition held long-term interest rates down
(buying long-term T bonds) while sopping up any money supply
implications and inflationary signals by sanitizing the process with the
sales of equal amounts of short-term bonds.”
Policy makers have not found a new way to indefinitely manage the
economy. Traditional laws of economics have not been repealed. The
Federal Reserve used the equivalent of a macro parlor trick to dampen
inflation signals and help produce today’s Goldilocks atmosphere, which
features stocks rising now that the public and its mainstream money
managers feel the worst is over with respect to the Fiscal Cliff
non-event and the Debt Ceiling noise.
But in economics and macro finance, there is is always a price to be
paid for unnatural (read: man-made) distortions. The Fed ran out of
short-term bonds to sell and now something has to give, as its ongoing
inflationary operation is now unsanitized.
A bearish Head & Shoulders pattern has formed on the currency for
which the Fed is supposedly a steward. If the neckline breaks, the
measured target is 76.50.
The weekly chart of USD targets 74 off of an even more significant
H&S, with the baby H&S of the first chart merely representing
the right shoulder of the big daddy H&S.
A breakdown in the US dollar would confirm that the recent tick
higher in Adjusted Monetary Base is the beginning of a new trend up in
Unsurprisingly, USD’s chief rival, the Euro is in an inverted and bullish H&S. We have been targeting 142 in NFTRH
since the break above the neckline. The Euro appears to be attracting a
‘long Euro/short Yen and gold’ momentum (read: hedge funds) crowd
playing the opposite game to that from mid 2011 when Yen and Gold rose
strongly in reaction to the Euro crisis.
Yen has been played to the hilt by the hedgies. We have had 106 as
the downside target since the neckline to the massive H&S broke
down. Yen could be a heck of a contrarian play for a counter trend
rally, as the short-covering should be massive.
Meanwhile, the currency that resides outside the system bides its
time. Gold is unofficial money and with all the hype about currency war
people who are not patient may have expected a rocket launch in the
Here we bring it back to the Euro and realize that too many unhealthy
would-be gold bugs came aboard during the acute phase of the Euro
crisis in 2011. That is being worked off now in gold’s ongoing
US dollar looks bearish. Euro looks to complete its rally to 142+
where it will by the way, encounter a bigger picture DOWN trend line.
Yen is bearish but due for a whale of a short-covering bounce soon.
In the near-term some currencies are bullish and some are bearish.
But the US Fed, Europe’s ECB and the BOJ are not going to engineer their
way out of their respective ‘inflate-or-die’ predicaments. Gold may
have a few more months of correction/consolidation but that is a drop in
the bucket when viewing its entire history as a monetary anchor to