So where do we head from here?
Ahead of the FOMC meeting, my expectation was for the market to be disappointed by a 25bp cut and an early end to balance sheet reduction. This would lead to a final spike higher in the DXY to 98.50-99 and Gold to fall to support at ~1400 and Silver to ~15.90. Miners would dump in the process. I wasn’t disappointed.
So where do we head from here?
Weeks ago, I shared my forecast for the DXY to rise to 98.50-99 with a tail risk of 101.60 and then down it goes to the mid-80s. If it has already peaked, then that move lower has begun.
The primary reason for my expectation that the dollar would peak, originally shared back in December 2017 and consistently in my articles and tweets since, was that the Fed would begin to cut interest rates and ultimately revert to QE, thereby pulling the rug from underneath the dollar. The Fed cut rates for the first time in ten years yesterday and ended QT.
I believe this signals the peak in the dollar because U.S. rates and yields have a lot further to fall than those in the EU and Japan. Further, while they have been engaged in QE for quite some time, the US has been pursuing QT. That has now ended. It is only a matter of time before the US reverts to QE, IMHO.
One of the few drivers of the dollar’s value relative to other major currencies has been relative interest rates and yields. This is demonstrated below by the spread between the U.S. and German 10-Year Yields. After all, the euro represents 60% of the DXY.
When the spread rises, i.e. U.S. yields increase relative to German yields, the dollar rises, and vice-versa for a decline in the spread. As the vertical yellow lines above show, the 10-year spread tends to lead the DXY. Since November, the spread has been falling whereas the dollar has been rising. History suggests that it is only a matter of time before the dollar catches down to the spread.
The fact that the Fed cut interest rates yesterday also reinforces this expectation. Now add the fact that the Fed has ended QT and will likely begin printing dollars again in the not so distant future, and it is not unreasonable to expect the dollar to fall and perhaps to new lows.
My forecast is for a drop to the mid-80s based on a chart below, which I first published back in November:
I believe the DXY has just completed wave B in an ABC move down to the mid-80s next. If this turns out to be wave 2 in 5 waves down, we could see the 70s instead.
Despite the rally from 2015, momentum has just continued lower the entire time across all indicators, foreshadowing a move down to lower lows.
So what does this mean for Gold, Silver, and the miners? In 2018, when the dollar rallied across the board, Gold fell from a peak of 1369 to a low of 1167. This time around, while there will be bounces in the DXY on the way down and pullbacks in the metals and miners, just as we saw yesterday, the overall trend for the latter is clearly up if the dollar tanks.
In the near term, Gold held support yesterday at 1400, and as I shared last week, I am looking for a higher high next above 1454 if the dollar falls. The same goes for Silver: We got an ABC wave iv move down to support at 15.90 and now we’re likely heading up to the ~17 in wave v. Given that the miners are a high beta play on the metals, they will follow them higher but likely exceed their performance.
All of this assumes that the correlation between the dollar and metals continues but it can and does break down in the short-term. There is a possibility that they both fall together at some point and the correlation breaks down for a period of time. That said, if or when we hit those higher highs in the metals and miners, the risk grows for a deeper drop in wave 2 or worse. But let’s cross that bridge next week.