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The U.S. dollare: A significant decline is underrway.

Dollar weakness yielding commodity strength

Market outlook considerations for the week beginning January 29, 2018

 For the U.S. dollar to be breaking down, in a global economic setting where deflationary forces dominate business trends and force consolidation throughout all sectors, is more than a little interesting, and creates massive hedging, speculative and portfolio management challenges for market participants.

Given today’s “debt burdened global economies,” one would expect just the opposite for an array of reasons related to global social, political, economic and homeland security.

Policy Fork in the Road

Very, and I repeat, very, simplistically stated, U.S. and global policymakers have two basic options: First, austerity and the attempt to live within one’s means to revive growth; and Second, stimulus driven growth, no matter the cost, to lift U.S. and global economies beyond today’s dominant  deflationary forces.  

It certainly appears U.S. financial policy engineers and their global counterparts have become unified in avoiding a near term serious U.S. and global recession or worse by maintaining U.S. and global economic momentum at all costs through economic stimulative fiscal, monetary, trade and regulatory policy activities.

Why is this? Individuals, families, and businesses, for financial survival, must live within their means; however, government, given today’s economic setting, whether domestic or global, living within one’s means guarantees dangerous and unpredictable social unrest, political instability, and economic uncertainty with extremely dangerous military friction possibilities.

So Governments and Central Banks have, and will continue, intervening with stimulative activities to achieve desired levels of growth in countries throughout the world, and this, coupled with an array of other factors, will provide a U.S. dollar with more weakness than strength for a period, which for now is a huge positive, not only for the U.S., but also for China the world’s two dominant global economic stabilizers.   

What to Watch For

What to expect as global stimulative policies achieve their global economic growth objectives. 

  •  Actual and anticipated global growth for 2018 and 2019 should be 3.9 percent-plus.
  •  The U.S. dollar sideways to down against most major global currencies. This will be as important for the Chinese economy as it is for the U.S. economy.
  •  U.S. and global sovereign bond yields need to make moderate moves in the direction of normalcy, and the moves must be gradual and highly calculated, otherwise they become highly counterproductive and stroke recessionary fires.
  • Most U.S. and global equities sideways to up in a manner that minimizes bubble concerns and lengthens the life of the business cycle.
  • Commodities as a group should start showing signs of increasing price strength due to stimulative global growth.
  •  Inflation should be supportive of policy objectives and global growth or enough inflation to meet the U.S. Federal Reserve target objectives.
  • Watch oil and base metal price stability or orderly demand-driven price movements. 
  •  Watch rice, grains, and most soft-commodities for signs of competition of a bottoming and basing process.

 Conclusion

 There is a time and place for a strong dollar, and a time and place for a weak dollar. If the U.S. is going to continue providing strong across-the-board global leadership, then a dollar with more weakness than strength is desirable for all, period.

Is multiple years of orchestrated global growth possible? Yes, it’s possible, but for market participants engineered global growth requires an elevated risk management plan, since no one in modern times has managed their money or someone else’s money in this type of dynamic economic setting; then remain alert, cautious, and/or have a defensive or exit strategy.  

 What to expect from the markets this week, January 29, 2018

 Near Term Snap Shot

  • Rice: This market likely has more weakness than strength as market participants digest potential of significant expansion of 2018 U.S. long grain rice planted acres (Charts 38 and 39).
  • Cotton: Cotton prices remain in a determined grind to the upside. Closing and holding above 88.50 cents implies possible significantly higher prices (Chart 40 to 42.   
  •  Soybeans: 2018 is likely a good year for grain prices, but near term it is still not obvious that this market has either fully corrected or found a bottom, so presently still give consideration to prices revisiting the 2017 low of $9.00, before turning bullish (Charts 32 to 34).
  • Corn: Searching for a low, so assume bearish until price action becomes more supportive of a bullish case and give consideration to prices possibly moving to their previous 2016 lows of $3.15 or below (Charts 35 to 37).
  •  Wheat: Wheat had an interesting week, a follow through to $4.91 would be very bullish (Charts 43 to 45). 
  •  10-year Treasury Yield: Closing above $3.00 would start the consideration process of a trend reversal, but difficult presently to see the 10-year above $3.30 this year (Charts 1 to 3).
  •  U.S. Dollar: A significant decline is now underway, so first give consideration to 87 before correcting, followed by a move lower possibly to 78 (Charts 4 to 6).
  • Oil $WTIC: Fundamentals and global uncertainties increasingly supportive of this market (Charts 29 to 31).
  •  $CRB Commodity Index: Policy intervention’s impact on macro factors and chart structure imply continued cautious optimism, though some back filling may be in order (Charts 26 and 28). 
  •  S&P 500: Trend remains up, but a cautionary time period (Chart 14).
  •  Global Equities Excluding U.S. and Canada: Trend remains up, momentum regained (Chart 16).
  •  Feeder Cattle: Bullish.  

 This Week’s Select Summary Considerations:

 10-Year US Treasury Yield:

  • Closing above $3.00 would start the consideration process of a trend reversal, difficult presently to see the 10-year above $3.30 this year
  •  Higher yields have been in part a function of U.S. and Global market intervention activities designed to extend domestic and global growth and the business cycles.
  •  Lower yields are a function of: Demand, Economic Weakness, Event Risk Concerns, or Other Market Concerns/Factors could take the yield lower.

U.S. Dollar Index:

  •  A significant decline is now underway, so first give consideration to 87 before correcting followed by a move lower possibly to 78.
  • Given global macro considerations coupled with no significant global anomaly event moving forward this index may have some serious weakness.
  •  Unless Middle East, North Korean, European, Venezuelan or other anomaly events start to dominate market participant decisions, then we are still in search of a major low for the dollar.

CRB Index:

  • Policy intervention’s impact on macro factors and chart structure imply continued cautious optimism, though some back filling may be in order.
  •  Global Government and Central Bank actual and anticipated intervention indicate a building fruit bearing process underway.

$WTIC Light Crude Oil:

  • Fundamentals and global uncertainties increasingly supportive of this market.
  •  Price action to $73-plus a consideration. 
  • A complex and volatile market focused on global uncertainties like Saudi Arabian and Iranian building friction, other Middle East challenges, North Korea, market structure, geopolitical considerations and building possibilities of a Venezuelan civil war are just some additional considerations, all deserve heightened respect in a world with building economic, social, political and homeland security uncertainties.

Soybeans:

  •  2018 is likely a good year for grain prices, but near term it is still not obvious that this market has either fully corrected or found a bottom, so presently still give consideration to prices revisiting the 2017 low of $9.00, before turning bullish.
  •   A world awash in liquidity, building economic momentum and many hard assets seemingly overvalued, be careful not to overlook the possible attractiveness of this asset to speculators, investors and end-users.

Corn:

  •  Searching for a low, so assume bearish until price action becomes more supportive of a bullish case and give consideration to prices possibly moving to their previous 2016 lows of $3.15 or below.

Long Grain Rice:

  •   This market likely has more weakness than strength as market participants digest potential of significant expansion of 2018 U.S. long grain rice planted acres.
  • Remain aware of potential near term uncertain global economic crosscurrents related to currencies, bonds, equities and commodities as they go through a rebalancing process.

Cotton:

  •  Cotton prices are in a slow grind to the upside. Closing and holding above 88.50 cents implies possible significantly higher prices.

Wheat:

  •  Wheat had an interesting week, a follow through to $4.91 would be very bullish

SPY SPDR S&P 500 ETF:

  •  Trend remains up, but a cautionary time period.
  • Consolidation or correction desirable not required. 
  • Allow price action to provide guidance.

$COMPQ Nasdaq Composite:

  •  Passive investors have lifted this market to a level that one should at least consider the risk vs reward.
  • Allow price action to provide guidance.

EFA iShares ETF - Global Equities Excluding U.S. and Canada:

  •   Trend remains up.
  •    Momentum regained.
  •    Allow price action to provide guidance.

EEM iShares ETF, Emerging Market Equities:

  •   A cautionary time, but momentum regained.
  •  Allow price action to provide guidance.

 

Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, University of Arkansas System, Division of Agriculture, Cooperative Extension Service. E-mail: [email protected]

 

Download Slide Show for charts and expanded details, Click Download Link

 

 

DISCLAIMER-FOR-EDUCATIONAL-PURPOSES

 

 

 

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TAGS: Crops Outlook
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