Friday, August 7, 2015

The Dollar-Oil Relationship

Personally, I am in the view that we are very close to a bottom in Oil.

The worst declines of the rig counts seem to be over. The market is extremely negative on Oil. The only factor that isn't playing nicely with my thesis is the USD, which I think is the most important factor of the 3.

Why?


The good guys from Market Anthropology make awesome observations like this.

If the USD tops out here, we would see Oil make a bottom and head higher. So what is the USD doing and what has it done before in the past?


I think this chart is just amazing.

The current narrative is that every mother son is long USD in anticipation that a rate hike will send demand rushing back for US treasuries. Which is why the USD has been on a disgusting climb the past year. Will it continue?

I think not. The last time we had such an extreme move in the USD was back in the 80s. Look what happened then.


The USD peaked out and reversed it gains rather quickly.

Of course, history doesn't repeat itself exactly, but it does rhyme.

At these levels of overbought, I am expecting a reversal in the USD strength in weeks, not even months.

Basically, observed in singularity, many signs are pointing to me that the drop in Oil may be over very soon. On it's own, there are many good reasons to look at the USD topping out. Add their close inverse relationship together and do the math, it seems very plausible to me that they will make make important turning points roughly at the same time together.

I may dive into broad commodities, but I think it is more likely that I would increase my positions in the precious metals. I bought Silver at $18 with a solid thesis. Silver at $14.70 still has that same strong underlying thesis, but at a much better price.

I would not be too eager to chiong into oil-related equity firms just yet. Even if oil prices do not go lower, stock market weakness could mean weakness in oil names as well.

WTI is at $44.20 now. Will it make a slightly higher low than it's previous low of $42 in March? I'm not sure if it will, but I know what I would be doing if it does.

1 comment:

  1. I don't think the 1985 USD peak is comparable today. The fall in the dollar then was actually a deliberate act of the US government. Few remember this today, but the Reagan administration cut a deal with West Germany and Japan to depreciate the dollar which spiked due to Fed hard money policies, which caused the 10 year yield to exceed 11%.

    https://en.wikipedia.org/wiki/Plaza_Accord

    Today however, there's no similar catalyst in play. It's not clear if the Fed thinks a strong dollar is going to hurt the US economy.

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