Minding the Trade Gap: Gold Breakout, EURUSD chaotic, USDJPY Continuation
Stock-Markets / Financial Markets 2018 Mar 26, 2018 - 01:15 PM GMTBy: Builderadv
Large tax cuts and spending increases enacted by Congress and the Trump administration are poised to push fiscal deficits above $1 trillion in coming years. Michael Feroli, chief U.S. economist of JPMorgan Chase & Co., has dubbed this the “square peg and round hole of fiscal and trade policies”—it’s nearly impossible for a nation to close its trade deficit while widening its fiscal deficit and expecting consumers to keep spending. Ultimately, “fiscal policy will dominate trade policy,” Mr. Feroli said. “Tariffs and other trade restrictions will be insufficient to lean against the overwhelming force.”
Worsening the situation is the fact that U.S. tax revenue declined in February and government spending rose, as the share of wages withheld for taxes dipped as a result of the tax cut passed by Congress late last year.
Government revenue declined by 9%, or $16 billion, in February compared with the same period a year earlier, due to a decrease in the amount withheld from workers’ paychecks and a jump in refunds for individuals and corporations, the Treasury Department said Monday. Meanwhile, the budget deficit reached $706 billion, 3.6% of gross domestic product, over the 12 months ended February, compared with $583 billion, or 3.1% of GDP, for the same period one year earlier. The deficit, or the difference between the amount of money the government spent and what it took in, stood at $391 billion in October through February. That was $40 billion, or 12%, higher compared with the same period a year earlier. The deficit is expected to widen further this year because of the $1.5 trillion tax cut. Government spending increased 2% in February from the same month a year earlier.
Reflecting the rising fiscal deficit via tax cuts and spending increases and the falling revenues, the dollar index has weighed down and fallen below 90 levels. This is despite a FED hike and 3 more hikes expected this year. The fiscal deficit and the trade deficit, twin deficit, are what is behind the lack of confidence in the US dollar. We see the dollar index tumbling to 82 levels before the year end (2018). This will see USDJPY break 100 levels and EURUSD break the 1.35 levels this year.
Dollar Index: Worse yet to come
DXY weekly charts show the strongly negative price action over the last 2 weeks. Any attempt to bounce has seen the more selling. We see DXY fall under 88 the next quarter
With the falling dollar, the commodity packs led by Oil and Gold has seen sustained bullish pressure.
Oil Weekly charts are bullish
Oil weekly charts are bullish. Prices are strongly pushed higher and even FED hike has not had a major impact on Oil prices. Above 69 we see prices moving fast to $75 as those are areas of very little resistance. A reflection of improving Oil prices is the increasing rig counts
Total US oil rigs were up this week, +4 to 804
A few comments from Steven Kopits of Princeton Energy Advisors LLC on Mar 23, 2018:
• Horizontal oil rigs were up, +1 to 708
• The Permian continues to perform relatively well overall, although only one horizontal rig has been added there in the last six weeks.
• The Cana Woodford was absolutely hammered again, now below its July peak
• The minor ‘Other’ plays have come back to life, with horizontal oil rigs there above last July’s peak for the first time
GOLD: Breakout of a ascending triangle
GOLD breaks out as shown above. The triangle has been in the works for some days
Weekly GOLD charts
GOLD weekly show a bit more noisy trend. The trend needs more clearance of 1330 level before we can conclude that long term trends have started
Given the weakness in the dollar index, some asian currencies led by Yen has seen major buying. YEN has been an outperformer
USDJPY: More falls coming
USDJPY weekly is targetting 103. The target will come as long as the pair stays under 107.
SPX: Gold ratio is key barometer of long term bull trend in equity
The SPX GOLD ratio has dipped below the 50 WMA and painted one of the largest weekly falls this year. The ratio suggests that capital is now increasingly preferring to move to Gold over SPX. SPX may rise from here on but GOLD will rise more.
Long term volatility picks up
The long 3 month volatility has broken out to 22 levels. We see elevated volatility for the near term future which will be reflected in fast paced moves and option pricing.
Commodity currencies NZD and CAD see buying
NZDUSD is at a long term inflection point. The weekly stop loss can be at 0.7200. If this level defends we see a clear breakout on NZDUSD to higher levels challenging 0.7500 levels.
USDCAD weekly has a bearish reversal candle last week and this week it has started weak. We see a powerful move down to 1.26. To know the the stops and target on the trade copier, please start a trade copier membership: Contact us
Summary: Falling revenues and increasing spending will exasperate the fiscal deficit in the US. It will have a punishing effect on the US dollar and long term inflation will pick up.
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By Buildadv
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