The Race to the Bottom

2019-06-21 | Sam Shames

Let’s review the big news of the week, specifically, the Fed and the ECB both trying to out-dive the other.

On Tuesday, we had Mario Draghi essentially front-run the Fed on Wednesday by stating that the ECB was very open to lowering rates and additional asset purchases. What does this mean? Well, it means that the ECB is willing to print more Euros and use them to buy additional assets.

On Wednesday, we saw Jerome Powell from Fed speak and given the events the day prior, he had quite a high bar to clear to please the markets.

The keyword that was removed from the May statement to the June statement was simple, the word was “patience.” By removing the word patience from the previous statement, the Fed is signaling to the market that it sees risk ahead and is willing to accommodate ahead of time with additional rate cuts.

Stocks and bonds both loved the news and went sharply higher since. But let’s look underneath the surface to see what else is happening.

When we look at the Dollar Index 3-day chart we see a couple of technical points. First, all the short-term moving averages have broken to the downside. There is a large squeeze in play. The RAF indicator is below neutral with a downward angle. The MACD trend indicator is rolling over. We have broken the lows from three weeks ago.

On the positive side for the dollar bulls, the 95.85 level is a long term 50% Fibonacci level.


This chart looks to be in danger of rolling over. The dollar rolling over has many correlations to tradable assets classes such as commodities (oil, metals, grains) and helps many multi-national corporations. Markets typically like lower dollar and commodities have been especially beaten up during the dollar rally.

If the dollar’s technical signals play out, we can be seeing a resurgence in the commodity space, especially if a deal (or signs of a delay) come to pass next week for the G-20 meeting.

Over the long run, I remain a dollar bull as I think all funds flow back in to the strongest currency. Also, because this is just the start of a game we have been seeing play out over the past decade. Specifically, central banks stumbling over each other to competitively devalue their currencies.

Once the ECB and Fed have given the green light we will start to see other countries, especially emerging markets, follow suit and drop their rates further flooding the world with liquidity.