What’s one of the best performing assets on the planet?
Try the U.S. dollar!
Despite all the hate our currency gets — and the very real fact we have long-term, underlying debt and deficit problems as a country — it has done nothing but rally since last May!
From a low of just under 79, the broad-based Dollar Index has surged to around 93. That’s an 18 percent run in just eight months, almost on par with the surge in late 2008 that resulted from the massive flight to quality during the credit crisis.
It also leaves the Dollar Index at its highest level since November 2003, as you can see here:
Keep in mind that currencies move in a less-volatile fashion than many other assets. So this is a big deal. And I believe the dollar rally is also driving deflationary fears and deflationary trends.
Look at crude oil. It has fallen roughly 60 percent, and done so in virtual inverse lock step with the dollar. Copper? It’s been falling right along with the dollar rally. For the majority of the decline, agricultural commodity prices and gold and silver prices fell right alongside.
So is something called the “five-year five-year forward breakeven rate.” This is a market-based gauge of mid-to-long-term inflation fears that the Federal Reserve follows; the lower the break even rate, the less inflation risk the market perceives there to be.
You can see here that this five-year forward rate has plunged to 1.78 percent. That’s the lowest going all the way back to 1999, and down sharply since May:
Now I was as happy as the next guy to profit from this move in the past several months, in particular, by shorting the euro currency. That was a home run trade for Safe Money Report since last spring.
Then yesterday, we got the European Central Bank’s big announcement — that it would buy 60 billion euros a month (or about $69 billion) worth of private and public bonds. The program starts on March 1, runs through September 2016, and could ultimately become open-ended if it doesn’t generate the results that ECB head Mario Draghi wants (read: higher inflation).
The euro lost two more cents against the dollar on the news, driving it to its lowest level since 2003. But as I noted recently, we are wildly, wildly overextended in this move. That’s why I took profits on the dollar positioning recently and moved on.
Moreover, did you get a load of the rally we just saw in the Swiss franc against the dollar after that bank abandoned its euro peg? Or the rally in gold and silver we’ve seen this month? Gold just racked up seven straight days of gains, rising more than 7 percent in value. That’s the biggest winning streak for the yellow metal since 2007!
These are the kinds of market signals that tell me this dollar rally could be close to running out of gas. It’s one reason why I’m bottom-fishing in beaten-down energy shares, and why I believe we could see a real shift in the market’s winning and losing sectors.
So please do pay attention, folks! The rest of 2015 could look a lot different than the first month of the year (and the back half of 2014).
Until next time,