The U.S. dollar is finally showing us signs of a decisive turn higher from severely oversold levels.
And a looming wave of short-covering should propel the buck sharply higher.
This comes in the wake of Friday’s positive U.S. labor market stats, as well as two disappointing data points out of Germany. The surprise miss in June Germany industrial production yesterday and soft export figures this morning show cracks in the bullish euro story.
And we think there is more where that comes from.
We anticipate U.S. economic readings later this week on July producer and consumer prices to reflect the impact of higher crude oil. And another whiff of inflation is all the Fed needs to justify higher interest rates and unwinding its balance sheet, which feeds back into more upside potential for the dollar.
We continue to watch the U.S. dollar closely and are considering adding to our ProShares UltraShort Euro (EUO) position, since the euro is nearly a mirror-image of the dollar index, and should slump as the buck soars.
We still have time left for our PowerShares DB U.S. Dollar Index Bullish Fund (UUP) September $26 call options, thanks to the renewed strength in the buck. A sharp short-covering rally will boost UUP even more, enabling us to gain back lost option premium. Stay tuned.
Expect another push higher for miners …
Meanwhile, the stronger dollar is having the opposite effect on gold and your junior gold miner positions, which is to be expected. But we are willing to hold out for more upside in junior miners.
In fact, that’s precisely what our E-Wave cycle forecast is expecting: A near-term bottom for the miners later this week followed by a rally back toward the July highs, as shown below.
We expect another move higher for junior mining shares over the next few weeks. This will benefit your Seabridge Gold (SA) and Sibanye Gold (SBGL) holdings, which we view as long-term, core holdings.
The expected rebound will provide more attractive prices to exit the Direxion Daily Junior Gold Miners Index Bull 3x ETF (JNUG) and VanEck Vectors Junior Gold Miners ETF (GDXJ) ahead of the next pullback, which we expect to play with inverse precious metals ETFs.
Now, turning to black gold …
Oil prices continue to dance around the $50 a barrel area, with special attention toward headline flow out of the two-day producer meeting Abu Dhabi.
Specifically, the question is; can OPEC members boost compliance to agreed production-cut deal, as well as secure further cuts in Russian and/or Saudi Arabian production.
In the meantime, expectations are for U.S. shale oil supply to continue to tighten and some large oil players are beginning to evacuate Venezuelan operations.
Both factors could easily drive oil prices higher from here.
Another supportive influence for oil over the intermediate term is elevated global demand, aided by stronger than expected second-quarter growth from China.
In the meantime, our E-Wave cycle forecast points to choppy trade for oil into late-August before making another significant advance into Labor Day.
As you can see from the above chart, upcoming congestion primes the pump for another move higher.
And our current position in the United States Oil Fund (USO) is poised to profit from the next wave higher in crude. Also, we may be adding additional energy-sector trades on any near term weakness for even more upside potential.
Meanwhile, keep holding all open positions and related stops, and stay tuned for new trade alerts, updates and analysis, coming your way soon.
Good investing,
Mike and David
