Reflections are Closer Than They Appear: Inflation’s Impact on the Dollar
"Another thing that I realize about myself that I don’t see in other traders is that I’m humble about my ignorance. I feel that I’m ignorant despite having made enormous amounts of money." Jim Leitner
The latest global macro developments signal inflationary pressures building while other central banks pivot to more dovish stances. This divergence may reignite inflation and weaken the U.S. dollar’s dominance over time.
Global Central Banks Pivoting to Dovish Stances
China:
Beijing shifted to a "moderately loose" monetary policy for the first time in 14 years, pledging more rate cuts and fiscal expansion.
This supports a weaker yuan as China tries to stimulate its economy.
Eurozone:
The ECB lowered rates to 3.0% and removed hawkish forward guidance, signaling further cuts are possible.
Revised growth and inflation forecasts highlight economic weakness, softening the euro.
Switzerland:
A surprise 50bps rate cut by the SNB indicates a move to curb safe-haven flows into the franc, aiming for a weaker currency.
Canada:
The Bank of Canada delivered its second consecutive 50bps cut, leaving its policy rate 150bps below the Fed, the widest gap since 1997.
No firm commitment to halt cuts suggests continued pressure on the Canadian dollar.
The U.S. Dollar Stands Out — For Now
Sticky Inflation Theme:
Recent CPI and PPI data reinforce persistent inflation, keeping the Fed cautious about deeper rate cuts.
The Fed Funds Rate remains 100-200bps higher than peer central banks, supporting a range bound dollar in the near term.
Long-Term Implications:
Inflationary forces could resurface as the Fed slows its rate cuts while global central banks ease aggressively.
Over time, a weakening dollar will emerge as other economies stimulate more aggressively, reducing the relative strength of U.S. assets.
The Bottom Line
Inflation is making a comeback globally, fueled by dovish central bank pivots. While the Fed’s higher rates keep the dollar rangebound in the short run, diverging policies suggest it’s only a matter of time before the dollar faces downward pressure.
Stay vigilant as this divergence unfolds, it’s setting the stage for significant macro shifts.
If the dollar stays range bound, how do you take advantage of it?
Right now, silver is giving us a massive opportunity. For short-term traders, holding silver from December 16 through February 14 has an 80% win rate. That’s huge. Plus, the median drawdown is just -5.77% (pretty chill for silver). Tight stop, easy trade, big potential. Throw in some call options (which AAO recommended this week), and suddenly that 10% average gain turns into 100-200%.
Right now Silver is sitting on the 30 week MA, a trend line and major volume support. If it holds here and gaps up on Monday or Tuesday. It is a raging buy opportunity!
While we're still riding the tech wave with positions in QQQ and SMH, it's time to keep an eye on the horizon. The disparity between tech valuations and the rest of the market has reached unprecedented levels.
Here are two charts that illustrate that.
Although tech remains strong for now, savvy long-term investors should start scouting for gems in the deep value sectors. The coming year might just be their time to shine.
Remember, when gold starts making moves, it often signals a broader shift into commodities like copper, oil, energy, and materials. Gold's current resilience suggests that such a rotation could be on the horizon.
But patience is key, wait for clear market confirmations before diving in. Always ensure that new trades align with market signals and validate your strategies.
Stay vigilant, trust the data, and be ready to act when the market speaks.
See you all next week! It is a great time to be a macro trader check out the returns this week.
Does anyone remember the Radiohead music video?
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