Weaker dollar pushing currency, Treasury & equity sectors

There ’s a picture taking shape in the macroeconomic world that can be seen in the correlated actions of the most significant traders in the currency, interest rate, stock and precious metal markets. We’ll deliver the data and the markets. You can draw your conclusions as to how it all plays out amid a trade war backdrop.

Beginning with the currencies, we see several signs that point toward a weakening U.S. dollar. The euro currency makes up 57% of the U.S. Dollar Index futures contract, and while the index remains in neutral territory, circumstantial evidence via the individual currency pairs shows that they are ganging up on the greenback. 

Commercial traders have pared their short position in the euro. While still negative, they’ve been covering their short position since the euro’s February high rather than adding to their short position on the market’s consolidation above $1.24.

Stronger evidence comes from the Australian dollar, Canadian dollar, British pound and Japanese yen, which contribute another third to the U.S. Dollar Index. Commercial traders have added nearly 10% to their increasingly bullish Canadian dollar position and 5% to their Australian dollar position. The British pound remains relatively neutral, but the trend has been higher and the commercial traders have only recently begun to sell into the rally. They seem content to let the pound test the $1.50 Brexit breakout level before asserting any real selling pressure. 

Lastly, the recent buildup in commercial positions short the yen was clearly a hedge based upon the March contract’s expiration as their total position dropped by more than 40% upon March’s expiration. The Japanese yen futures are now well supported above the 90- and 120-day moving averages, and above the downward sloping trend line, which dates back to the 2012 high.

Briefly touching on interest rates show the continuation of record buying on the short end of the yield curve we discussed last month. The Eurodollar set another new commercial net-long record along with the five-year Treasury note. 

Meanwhile, the 10-year Treasury notes are within 10% of surpassing the record they set this March. Sympathetically, commercial trader momentum in the 30-year Treasury bonds has now turned positive. Collectively, they make a strong case for the February high yield marks to hold awhile.

We can’t discuss interest rates without discussing the stock market. The S&P 500 futures are 10 times larger than any of the other stock index futures contract. Therefore, when the commercial traders create a ruckus in the S&P 500 futures, we take notice. They’ve both sold more in a single week (383k) than any week since September of 2007 and set a new net-short record (436k), eclipsing their previous record from November of 2006 (411k). Actions speak louder than words.

Finally, the most fully developed trade of these setups lies in the silver futures. Silver miners’ hedging of anticipated production keeps the net commercial position in the COT report in negative territory. However, it is currently the least negative it has ever been and, therefore, a new bullish record. Furthermore, volatility has continued to decline since February as the commercial traders have gained market share. This behavior is increasingly bullish, and strongly suggests a breakout sharply higher and a test of $18 per oz. 

Collectively, commercial traders are forecasting a weaker dollar and stock market along with rising silver and Treasury prices (declining yields). The silver setup is very similar to the prediction of higher coffee prices late spring/early summer from last month’s column.