The start of a long-term USD bull market ?

The current fashionable market opinions by many experts are that with the US government's ballooning deficit and the massive explosion of money supply, the imminent collapse of the USD is almost unavoidable. With that would bring forth a super inflation and another super bull rally in the commodities.

Will that be really the case here ? I think this issue deserved some further examination. First let us take the views of some alternative fundamental analysts who are obviously in the minority:-

PEOPLE NEED TO START BORROWING FIRST

Mark Vitner, a Wachovia Securities' senior economist , believes that inflation worries have gotten ahead of themselves. “Until people start borrowing from banks, the monetary base doesn’t really become the money supply,” Vitner explains. The money supply growth has been dramatic. The measures of M1 and M2 are both up at a 9.5 percent annual rate since November, and the monetary base is up at a 53.1 percent annual rate during this period, according to Vitner.
But what does this really mean? “The fuel for higher inflation is there,” Vitner says. However, until individuals and companies start actively borrowing from that increased monetary base now sitting in bank vaults, the actual money supply in circulation does not rise. With the current personal savings rate surging higher, people are not buying new houses, cars or other big-ticket items that require financing.

While the editor of View on Futures,Glen Ring says “We had a 50-year credit expansion; now we have a credit contraction. Deflation is being caused by de-leveraging. The savings rate has gone from 0.5 percent to 5- to 5.5 percent in one year. That is a 1,000 percent rise in the savings rate. People are not borrowing. They are saving. We are reversing the credit expansion, and that takes decades to reverse.”

Although inflation bugs point to the recent rally in commodities and excess liquidity rolling around in the financial system, before inflation can actually begin to increase, we need to see some economic activity, recovery and growth. “Unemployment is high and rising, while capacity utilization is low and falling,” Vitner says. “Generally, you have to have low and falling unemployment and high and rising capacity utilization to see inflation come about.”

Miller Tabak & Co's chief technical market analyst Phil Roth pointed to the rally off the March lows in U.S. stocks, commodities and interest rates. He says “Investors were betting on a strong economic environment, which we don’t have. Inflation is not a problem now and won’t become a problem until the next economic expansion. It is just about impossible to have inflation in the midst of this economic contraction.”

Does gold, which is considered a quasi-currency and the made believe inflation and safe-haven hedge? “Ring's belief is that the gold rally is a speculative rotation, but the currency will actually represent cash.” He points to recent economic human history as the reason that gold can no longer be considered a currency. “It has been three generations since any society has regularly done commerce in gold,” Ring says. “Cash is going to be king. The U.S. Dollar Index will be key to watch.”


WHAT IS THE CYCLES SAYING ?

Robert Fetcher of Elliot Wave International has applied Elliot Wave to study the past 100 years of commodity markets. He thinks the commodity's bull rally actually begun in 1890's and has ended in 2008. The recent bull moves is regarded as a counter trend wave 4 in a bigger bear cycle or what is generally termed as a bear market rally. The move was caused by the weakness in the USD. He expected the current bear cycle to last for another 2 years and the 2008's high will stay good for the next 20-30 years.


Glen Ring also agree that the commodities bear will last till the end of 2010. Since historically the month of September and October are times of weakness for equities, both of them agree that we would probably see a real bottom in the US equities and USD in mid September to October.

A major long-term bear market occurred from January 2002 to the March 2008 low in the dollar. Since then, global safe-haven, panic buying has spurred a healthy rally a high on March 2009 high. After which a significant retreat in the dollar unfolded, which helped spark the recent rally in commodity markets. Commodities, which are priced in U.S. dollars, tend to have an inverse correlation to the currency. A weaker dollar will strengthen commodity prices and vice versa. After all, the super bull market in commodities began back in 2001/2002 when the dollar began its fall into a multi years bear market.

WHAT ABOUT THE CHARTS ?

Lets first take a look at the USD Index weekly chart where we see the market has already done a healthy 61.8% retracement. The Stochastic is currently forming a bullish divergence with the price at the oversold area. The MACD is seen here slowly closing the gap while the ADX is now above both the D- and D+ which is indicating that this market may be oversold.


The daily chart is also very bullish as the MACD has already formed a bullish divergence with the price and it continues to climb towards its zero signal line which is getting increasing bullish. This market has been range bounding for the past one month, thus we see the ADX now has fallen below the 20 signal line and causing the Bollinger Band to tighten at the same time. Of course in this kind of trend less market, we cannot say prices will not go further down, but a closing above the upper Bollinger Band , especially above 79.60 should see the USD bull roars.


With divergence found at both the daily and weekly chart, the USD bull should be more convincing than ever. Looking ahead, both Ring and Fetcher see potential for the U.S. Dollar Index to post sharp gains. Ring points to a target at 105 in the index, whereas Kennedy says wave patterns suggest the new primary trend is up: “We’ve seen five [waves] up off the 2008 low.” He points to a conservative target at 96/97 in the U.S. Dollar Index, with a more standard projection at 108.

To sum up the arguments here: inflation will not happen unless there is a real economy recovery return; Commodities will not have another bull rally base on Elliot Wave long term count and if USD strengthen and the charts favor a USD bull rather than a bear.

The markets always turn the corners when most people are not looking which will cause many of them great losses. And why people are not watching ? It is always because they are paying too much attention to what is fashionable of the mass opinions. So at present we have so much talks about gold is king and USD will become banana notes , maybe you should start to look at the opposite direction.