If you enjoyed watching Janet Yellen spend several hours avoiding saying anything remotely interesting yesterday, you should love today’s Senate Banking Committee testimony.

In the meantime, EURUSD has reversed at our upside target and broken trend to the downside……even as USDJPY makes a feeble attempt at stabilizing.The net result is a dollar index which seems utterly confused.There are two clues, however, that should not be missed.  One is that PPI came in at +2.0% YoY, a very questionable number given the actual sharp decline in oil and gas prices.   But, not surprising, given that the Fed is trying to defend the USD here…continued for members… (more…)

On May 16, we adopted the position that weak inflation – driven primarily by oil prices that we expected to plunge after a brief rally – would lead the EURUSD to rally sharply [see: May 16 Update on EURUSD.]

Our forecast, shown below, also required DXY to make new lows — which most analysts derided as unlikely in a rising interest rate environment.

Sure enough, WTI spiked for about a week, then plunged right to our downside target over the following month.This took the wind out of inflation’s sails, leaving the Fed’s rate hike argument looking more than a little iffy.The net effect?  Yesterday, EURUSD nailed our upside target.

With Yellen’s testimony coming up, it’s an opportune time to review the overall currency picture and its likely effect on equity prices – and, by that, I’m not talking about the latest VIX-driven ramp job. I’ve been promising a turning point for the past several weeks, and it’s finally here.

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Everywhere you look, another hedgie is throwing in the towel — pronouncing the market overbought and susceptible to a big drop as a result of Fed normalizing.

I agree that rate normalization would be devastating for stocks.  But, folks, an additional 1/4% in Fed Funds is far from normal.  Call me when the 10-year gets back over 6%.  In the meantime, all the gnashing of teeth should just stop — at least as far as rates are concerned.

Investors should, on the other hand, be concerned about the veracity of information pouring out of Washington, the quality (and lack of) earnings growth, and the ability of central bankers to keep all the plates spinning a little longer.

The apparent equilibrium is tenuous at best, and largely relies on the inability or unwillingness of the few remaining active, fundamental investors to recognize the tricks and gimmicks being used to keep equities on the rise.

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With oil sliding and the USD on the ropes, equities are having a tough time maintaining the exuberance of Friday’s snap-back rally. ES has given up a 7.5 point rise and is trading slightly in the red.

This leaves SPX with an opportunity to extend last week’s slump, but only if currencies cooperate. As we’ve discussed the last few weeks, several pairs are on the cusp of a major move.

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To everything (turn, turn, turn)
There is a season (turn, turn, turn)
And a time to every purpose, under heaven

The dollar’s dip has been a headwind for the markets, but it’s served a purpose: resetting various carry trades and putting things on firmer footing for the next stage.  I don’t know whether central bankers will be able to pull it off.  I don’t even know how they’ll attempt it (though I have some suspicions.)

I only know that EURUSD’s reversal at our 1.1470 target from Jun 13 [see: The Rally That VIX Built] is quite important.  And, if DXY should slip below its recent lows, equities are not going to take it well.

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It’s getting pretty tough for the few remaining live investors to believe the Fed’s rhetoric about the need for another rate hike — let alone the wisdom of the latest one.  Yesterday’s minutes did nothing to change that.

After a nice bounce (where it needed to bounce) the DXY is sliding back into negative territory this morning, taking the bloom off the yen carry trade and S&P futures both.SPX, which reached our IH&S target way back on June 1, still needs to backtest support after its latest suspect breakout.  Will today be the day?

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With FOMC minutes due to be released this afternoon, the dollar should continue to dominate the markets.

USDJPY’s recent breakout is looking more and more like the real thing.

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The Trump Rally never made sense to me [see: Why the “Trump Rally” is a Fraud.]  Yet, breakouts are breakouts, even if they’re driven by algo trickery and trend followers.

SPX’s breakout in November was driven by exuberant spikes in USDJPY, DX and WTI and a historic suppression in VIX, which is at a crossroads.  If it’s to continue driving stocks higher — or even offset economic news that would see them correct, it must plumb new all-time lows.

Our recent bottom call on oil [see: June 20 Update on Oil] was offered with the understanding that it has a natural upper bound — particularly over the next month.  And, the US dollar…well, it is flirting with danger.  It dropped below very strong support yesterday.

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Today, it’s all about the USD.  EURUSD continues toward our upside target, while USDJPY is pedaling as fast as it can to compensate.  As we’ve discussed all week, this leaves DXY at long-term critical support.Thanks to VIX and USDJPY, equities were able to put on quite a show yesterday, rallying back above support as expected.

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Two weeks ago I floated the idea that the USD, which had broken down below a long-term trend line and bounced, wasn’t done [see: The Rally That VIX Built.]  While the effects on equities would likely be muted by drops in VIX and a rise in oil prices, currencies were in for some significant moves.

Our thesis was that US economic data would continue to come in weak, and the USD would finally be able to tag critical support — the midline of a channel dating back to 2009 and the .786 line of another dating back to 2003.Yesterday, that move finally played out, resulting in a healthy sell-off in equities.  SPX, which reversed at our upside target on Monday, dropped to slightly below our downside target — a backtest of the large Inverted Head & Shoulders Pattern we’ve been tracking and a nice 30-pt short.With futures up over 7 points this morning, is the worst over?

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