Hey There Income Hunter,
Another big day in China is giving more credibility to a turnaround there.
Banks are jumping on the bandwagon as Bank of America is now “tactically bullish” on Chinese equities.
Even the Oracle of Omaha Warren Buffett is jumping in the pool, with a cool $5 billion investment in Taiwan Semiconductor Manufacturing Company Ltd. (Ticker: TSM).
TSM was up 10.5% on Tuesday, while Tencent Music Entertainment Group (Ticker: TME) was up more than +30%.
What might this mean for the US dollar? China is back in the spotlight and heading towards a reopening and recovery from their real estate crisis.
The US is having a nice seasonal rally, but is still heading towards an earnings recession in 2023.
The dollar may fall a lot further.
Today we’ll take a look at the ramifications of a Chinese turnaround.
Not Great!
No doubt the optics are not good …
China´s lockdowns will most likely end in H1 2023. Meanwhile economic data in the U.S. is now slowing relative to the rest of the world.
This turnaround has happened so quickly since it seemed that American superiority was the macro theme thanks to the almighty dollar.
US Update
The good news in the US is that CPI is coming down, but at the same time earnings misses and layoffs are piling up … just look at Fedex, Geico, Salesforce and Meta.
Also, one thing I have been hitting on is auto loans, which are more than 60 days past due and are near ten-year highs.
Plus, consumer credit deterioration is not slowing down and personal consumption is 70% of total US GDP ($25 trillion).
Total household assets are down over $9 trillion since the end of last year.
The Fed can keep talking about the strong consumer, but in reality they are no better off than they were pre-Covid.
A Dollar Drop Is a Good Thing
The weaker dollar is exactly what the US and the world needs right now …
In my opinion, the Fed should outright pause its tightening at the December meeting. CPI has rolled over and should head lower over the next few quarters.
A lower dollar will boost global growth and US growth, as well. Most importantly it will keep inflation from falling too fast …
As you can see below, the dollar could head a lot lower from here before it has an inflationary impact on the US economy.
Short-term, the Dollar Index (Ticker: DXY) may get a good bounce off the 220-day moving average, but a lot of damage has been done and the high is likely in.
If we see a bounce to 108 that would be a good spot to set up a short via the Invesco USD Index (Ticker: UUP). This is the closest to outright oversold the dollar has been since December 2020.
When the tide turns on monetary policy trends, currency trends shift and they can be powerful. Check out next year’s predictions for rat hikes around the world.
The US will go from the most hawkish country to the least hawkish (aside from Canada). That will put a lot of pressure on the dollar.
Bring It Home
A weaker dollar in the months ahead will help the US increase imports and offset some of the damage we will see from wealth destruction, layoffs and weaker earnings.
If the Fed is smart, it will use those forecasts to pause tightening and see what the data looks like on the horizon.
The macro crosscurrents of diverging policies will certainly provide great trading opportunities ..
I am locked and loaded to crush the markets with my live event this Thursday at 7 p.m.
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Until then …
Live and Trade With Passion My Friend,
Griff