In last month’s update on currencies [see: Mar 7 Update] we noted that DXY was closing in on our upside targets but would require some consolidation first, USDJPY was due to breakout and rally to its next H&S target, and EURUSD’s bounce would not persist.

A month later, each of these has unfolded almost exactly as expected, with DXY tagging its 100.042 target on Friday after spending the past year in an exceptionally well-formed channel.

We expect the trend to continue for a number of reasons.

continued for members…None is as important as the runaway inflation gripping the country right now.

First, a quick overview of this morning’s charts. ES is off about 30 points, following the falling white channel fairly closely.

CL and RB have given back Thursday and Friday’s gains and then some. It’s a start, but it obviously won’t make any difference to tomorrow’s CPI data or Wednesday’s PPI data. The problem, as we’ve discussed countless times, is that rapid inflation growth, initially caused by the oil/gas rally, spread to all categories and to wages. Then Russia invaded Ukraine, further exacerbating the fuel and wheat price hikes. And, because the Fed waited so long to hike interest rates, housing affordability continues to be a problem (though it is likely topping.)

One solution to many of these problems is a higher USD. As a net importer, the US relies on the dollar’s buying power to keep prices from foreign manufacturers affordable. When the USD tumbles, inflation rises. When it rallies, inflation is moderated. The Fed needs inflation to fall quickly, but isn’t so keen on causing a recession which would be a near certainty if they actually raise rates as much as folks expect. The only other solutions would be to crash oil/gas prices – tough to do given the situation in Ukraine – or to let the USD run.

Hence, DXY is back inside the purple channel it broke down from in August 2020. If the red channel continues to hold, it will soon top its Dec 2016 highs (CPI was 2.07%) and the top of the rising white channel at 106.27.The white channel top could also be considered a neckline for an inverted H&S Pattern, which is why getting much past 103-106 would be quite a challenge for DXY.

BTW, going forward I’m shifting the rising purple channel to include the 2020 lows as seen below.Since DXY is a function of its value relative to other currencies, primarily the euro and the yen, we need to know whether these other charts agree with the DXY prognosis.

The EURUSD bounced nicely after reaching our 1.0829 target in early Mar, but is right back down to it. Given the need for additional stimulus to offset the disaster in Ukraine, it should continue to fall. Since the euro is 58% of DXY, it’s not too hard to imagine a 7.4% drop to the yellow .618 at 1.0071 corresponding to DXY’s next higher target – a 6.3% rise to 107.276 – particularly when combined with the yen’s expected move.As we often discuss, the yen is less a currency than it is a mechanism by which the BoJ can keep stocks on the rise.

Having broken above two necklines, it now faces a third: the purple one at 125.55.A better view…

Note that the white channel top doesn’t count as a neckline since the 1995 bottom was lower than the 2011 one. But, if the current breakout persists (no backtests yet) the sky is the limit for USDJPY.  We start with the white .786 at 132.22, the white .886 at 139.43, the 1998 high at 147.65, and then all the way up to 167.25.

The continual devaluation of the yen (the yen carry trade) has been the primary driver of Japanese stocks, rescuing them at every turn since Fukushima.

Note that NKD has already backtested its Feb 2020 highs.Since Japan’s inflation is also on the rise, there will come a point where the BoJ stops the yen’s deflation and the commensurate drain on bank, insurance company and pension earnings. All I know if that is that the purple neckline dating back to 2002 is broken, the fundamental problems facing Japan’s economy will get much, much worse.

While we’re on the topic of currencies, gold and silver are both getting a bounce today. It remains to be seen whether this will be a leg higher or just a bounce on the way to those lower backtest targets. BTC sliced right through the black target and is closing in on the blue TL. If that doesn’t hold, the orange is looking really good.Last, don’t look now but the 10Y has left the station.