The dollar has been in a slow sideways to down decline since late 2016. This is interesting because at the start of the decline one could characterize U.S. and global economies as struggling with: Chronic to slow growth, low to negative interest rates, and anemic inflation.
For global investors, the U.S. dollar, interest rates, equities, land, and fine arts represented a reasonably safe heaven compared to other global investment allocations, thus in late 2016 one would have expected the dollar to have gained momentum and strength, not the exact opposite.
Since late 2016 the dollar was allowed to weaken, as global governments intervened and provided stimulus-driven global growth or synchronized global growth.
Synchronized Global Growth
Engineering synchronized global growth over a multi-year period to avoid a potentially devastating global economic downturn where deflationary forces rule, potentially similar to the “Financial Crises of 1907 and the Great Depression” is a challenging and an absolutely necessary undertaking for Global Governments and Central Banks.
The objective of synchronizing growth is to move toward normalized global growth by achieving individual growth, interest rate, and inflationary objectives in the world’s economically active countries. These goals were achieved with reasonable success in 2017 and continue to build momentum in 2018 and likely well into 2019 at the very least.
Stimulus-driven global growth over multiple years requires acute attention to detail associated with fiscal, monetary, trade and regulatory policies, especially by the world’s significant economies.
The key challenge of stimulus-driven global growth is keeping markets and economic activity balanced and reasonably aligned for extended time periods.
For market participants, if the world’s governments and central banks are potentially limiting their downside risks, then market participants tend to become increasingly aggressive in their investment and trading activities; this tends to lead to overvaluation and bubbles in many markets.
Therefore, just as global governments and central banks intervene to achieve lofty global growth and other objectives, their intervention game plan also includes removing market excesses that lead to market bubbles, which is to say they have to allow markets to re-balance.
Presently, expect a likely additional one- to two-plus months of re-balancing and realignment in and among many the world’s key currency, interest rate, equity and commodity markets.
Looking at the week ahead
U.S. Dollar Index: Consider an extended corrective period for the dollar. Since February 1, 2018, the dollar has been correcting sideways mostly in time, but now one should anticipate the potential of a possible one -to two-plus months correction of the downside move before the index moves significantly lower. The primary trend of the U.S. Dollar is down, but the final low may take a year or multiple years to unfold.
10-Year US Treasury Yield: Investors are showing increasing interest in this market as many U.S. and global equity markets go through a corrective period. Therefore, the 10-year yield likely continues moving sideways to down as markets realign for another one to two-plus months.
S&P 500: The trend in this market remains up, but one should anticipate an additional one to two-plus months of a potentially stronger corrective activity, so exercise caution. Simply watch the price action for guidance.
NASDAQ Composite Index: This market has entered a potentially strong corrective period. Just let price action provide guidance.
CRB Index: As long as Light Crude Oil remains above $60 per barrel, this commodity index is reflecting the dynamics of stimulus-driven global growth. I remain bullish global growth beyond this ongoing corrective equity period, therefore, I am bullish demand for commodities globally and oil specifically as the year progresses. Near term additional consolidation is likely to occur. The CRB Index needs to hold support at 185, otherwise major commodity weakness could emerge.
$WTIC Light Crude Oil: This is a market that is defining a new trading range with a near term price floor of $60. There are an interesting array of factors from fundamentals, to global policy drivers, to social, economic, political, and military uncertainties that keep this market at elevated levels, and they do not appear to be losing their influence on this market anytime soon.
- Soybeans: On soybeans, some see major potential as a value investment, while others see a huge speculative opportunity; others see fundamental bearishness, etc. Current price action appears to remain corrective, with little reason not to revisit the $10.80 area. If prices hold March 29 gains this week, they likely become increasingly attractive to value and speculative investors during the global equity corrective period.
- Corn: Corn ending this week or the week of April 2 above $4.00 would likely attract some major speculative interest.
- Wheat: Wheat is holding support and like corn may see additional price strength this week.
- Long grain rice: At current price levels USDA’s Planting Intentions Report is supportive of current and new crop prices, especially given current grain price dynamics. Without a new demand source, producers planting beyond their March planting intentions would likely put downward pressure on long grain rice prices.
- Cotton: Cotton prices appear to be correcting their upside price advance before moving higher.
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: firstname.lastname@example.org.
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