Market Weekly: Here Comes the Dollar Thanks to Italy

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by Tom Luongo, Tom Luongo:

The whole “Death of the Dollar” thing is completely overblown nonsense. It’s as hyperbolic as the insurrection rhetoric coming from the Democrats over the “Attack on the Capitol” on January 6th.

This dollar death spiral narrative is just that, narrative. Weakness in the dollar in 2020 came from political unrest and the most epic, corrupt fight for control over the U.S. government in more than a hundred years.

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That fight is over. Joe Biden will be inaugurated on Wednesday in an event worthy only of the mightiest Banana Republics. But don’t think for a second that political order hasn’t been restored for the time being in D.C.

It has. It may have been at the point of many guns and bucketloads of cheating but it happened. Be angry about it, of course. Cheating should never be rewarded, but from a market and investor perspective, uncertainty, for now, is off the table.

And markets hate uncertainty, which is why the dollar was weak after the Coronapocalypse.

So, it’s a new year, a new administration, new asset allocation strategies for fund managers and the dollar was staring at a cliff wall on the USDX, approaching but not breaching the February 2018 low of 88.15.

With each push lower on the USDX since the Coronapocalypse in March the USDX has pushed harder against resistance with each important moment (See chart, orange arrows).

Note the four periods highlighted. The first one was thoroughly bearish, with “No Hope of Reversal” in the bounce. After that there was a “Failed Reversal,” followed by a quickly reversed reversal (“Back-to-Back Reversals”) which culminates in this week’s strong “Two-Bar Reversal”).

In my read here, the “Failed Reversal” in September is what set up the last leg of the dollar bear market. Had the USDX completed the two-bar reversal there we would almost certainly be looking at a different scenario today.

But sometimes markets have to get way offside, overly unbalanced in one direction in order to finally put in a definitive bottom or top. The “Back-to-Back Reversals” in October were the catalyst for the further breakdown of the USDX.

That set up the strong move this week into the close on Friday which should be disturbing for a dollar bear.

That this happened against the backdrop of Biden’s unveiling his stimulus and tax plans for his administration tells me that risks are shifting away from the U.S. and back towards other areas of the world.

And other areas of the markets. Stocks sold off into the close, gold was monkey-hammered again, but held (barely) medium-term support at $1819 (cash basis) and bitcoin had the kind of volatile week associated with rallies running out of steam.

The euro put in a very weak close this week, which is why the USDX jumped the way it did. And the question is why?

It’s not a hard question to answer if you’re looking at the big picture. Political unrest in the U.S. is ending while it is rising again in Europe, post-Brexit amidst draconian lockdowns over the new Super COVID 2: Viral Boogaloo.

The Dutch government under Prime Minister Mark Rutte resigned on Thursday thanks to a scandal involving abusing lower-income families child subsidies.

Rutte is a Davos Man through and through and this resignation may be some typical deck chair shuffling ahead of March elections there, since he’s done his job to sell the Dutch out to fund euro-zone fiscal integration and tempt the country to go harder left after the ‘conservatives’ abused poor people clawing back gov’t handouts.

The current polling certainly suggests nothing untoward happening in March. But, things change and this election will be important to watch.

More significantly is what is happening in Italy as Former Prime Minister Matteo Renzi took his ministers and left the coalition there. Renzi first bolted from PD, the Democrats, and formed a new party (with all of about 3% support) taking a couple of cabinet ministers with him.

Then they pulled out of the coalition sending Italy towards its 131st government in 160 years. Gods, I do love Italian politics… from an entertainment perspective, of course.

This, I think, is a power play by Renzi to change the makeup of the government without calling for an election, in effect restoring him to power as effective Prime Minister since the fragile coalition there needs his votes and polling is against all the parties in power.

Renzi becomes the tail wagging the dog in the corrupt romp and stomp of Italian politics.

It’s the kind of in-fighting and back-stabbing that is the hallmark of Italian Politics. And it doesn’t bode well for the government surviving until elections in 2022.

The goal will be to further marginalize Five Star Movement (M5S), reducing their influence within a government they are supposed to be the dominant member of.

Read More @ TomLuongo.me