Morning Comment: Dollar Testing First Key Level Support (again)

  • The market is dead flat this week. Waiting on tariffs
  • The DXY dollar index is breaking its 200 DMA (1st support).
  • The next (more important level) is 96 on the DXY.
  • More dollar weakness will be very important for EM's (& other markets)

As it usually does, the stock market rallied on the day the Fed made their regularly scheduled announcement and held a press conference. (We the word “usually” in the previous sentence because Chairman Powell had a couple of stumbles early in his tenure, but he seems to have righted the ship nicely.) The rally, however, was a mild one…and the stock market remains basically dead flat so far this week (-0.14% to be exact). In other words, the focus this week was never going to be on the Fed. It was always going to be on the trade issue…and since we still haven’t received any definitive word on the December 15th tariffs, investors are just sitting on their hands until they get that definitive news on this issue.

Pretty much everyone (including ourselves) is looking for the new tariffs to be delayed/postponed by Sunday…whether we get a “phase one” deal or not. This is already priced into the stock market, so although we’ll probably get a very brief relief rally if/when this news is confirmed, it’s hard to think that it will create any sustained further advance (as it is already priced-in). Therefore, if we’re going to see a powerful move before the end of the year, the “trade announcement” is going to have to include either an implementation of these new tariffs (very bearish) or a roll-back of some of the existing tariffs (bullish). (The market has also priced-in at least SOME chance that the existing tariffs will be rolled-back, so the bearish potential is greater than the bullish potential.)

Even though yesterday’s news out of the Fed did not cause a big move in the stock market, it DID cause the dollar to drop in a material way....and this took the DXY dollar index down to it lows from October and November. It also took it below its 200 DMA...which has provided excellent support for the dollar all year. (Yes it saw a drop below its 200 DMA much like this one back in June...only to bounce-back very quickly. Therefore, we have to guard against another "head-fake".) However, if the greenback falls further this time around, it's going to be a BIG yellow flag for the U.S. currency.

As we have been saying, it will take a meaningful break below the 96 level on the DXY to confirm a change in trend for the dollar. So some further weakness over the near-term would not be a disaster, but it WILL be a yellow warning flag. As it always seem to do,

One of the biggest beneficiaries of a weaker dollar should be the emerging markets...and looking at tis multi-year chart, the EEM emerging markets ETF is setting up for a breakout move.

The EEM made a nice "double-bottom" low in the second half of 2018. After seeing a nice rally in early 2019, it rolled back over, BUT made a "higher-low" in August (making its 2019 low higher than its 2018 low). It has rallied nicely again in recent months...and this most recent "rally leg" took the EEM above its trend-line going back to early 2018. It is now closing-in on a key resistance level. If it can break above the $45 level in any significant way, it will follow the "higher-low" with a VERY important "higher-high"...which should confirm an important change in trend for the emerging markets. (Charts attached below.)

Needless to say, a confirmed change in trend for the dollar will have implications for all sort of risk assets…including several groups and individual stocks here in the U.S. Therefore, any further decline in the dollar as we move into 2020 will have all sorts of implications for investors…and thus the currency market should remain a key focus for all of us.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Dec 12, 2019 — 9:12 AM
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