At the beginning of each year I like taking a longer term view of all asset classes. By running various scenarios and rehearsing how we will act and react, we have our gameplan for the upcoming year.
In reviewing our monthly charts, the one asset class that stood out the most was the USD, and in particular it's current precarious position.
Please look here:
A clear topping pattern whereby we are currently right at 3 year support at the 92 level. Once prices break we can be sure that Funds will be gleefully piling on to their exiting sizeable short positions, providing the fuel to get the breakdown going.
If we step back and take a birds eye view even further, we see the following:
1) DX was crushed after the Dot-com bust and aggressive easing by Greenspan from Late 2001 thru Q1 2008.
2) Interestingly at the height of the GFC we see the USD bottom and begin a 9 year retrace of that fall, stalling at the .618 Fib retrace level. Even though Bernanke did a "Greenspan" on steroids, King Dollar was in demand. So if cutting rates to zero and 5 Trillion plus in QE was bullish for the greenback, then the reversal of this policy via rate hikes and QT appears to be dollar negative.
Perhaps the markets are telling us this will be inflationary? Perhaps the market thinks the FED will be forced to reverse course and whatever new chicanery they come up with to deal with in the next crisis will send the USD to the dustbin of World Reserve Currency History?
Or maybe it's the market starting to come to grips with the new Petro Yuan and the threat it poses to the Dollar. While we may never know the answer to "why", it certainly looks like a test of the 84 range is in the cards for 2018, with plenty of potential downside over the coming decade, back to 72, and then even lower depending on future fiscal and geopolitical policies.
So now to our 2018 Forecast and favored Trade scenarios for 2018:
1) DX will trade down to the 84 level at some point this year, which will get Institutional players to finally start focusing on inflation plays.
2) The EUR will trade to the 127 range.
3) A few weeks back on this blog we called for a reversal in the Precious Metals and this is exactly what we got. While prices are extended on a short term basis, the long term picture looks excellent.
We expect Silver to rally 20% in 2018, and test the 2016 highs around 21.
4) Oil looks extremely bullish technically. Now that we have crossed over 60, there is very little resistance prior to the $70 range. Commercial Positioning is, and has been, extremely bearish over the past two months. As discussed previously on this blog, this has historically led to negative price dispersion, so we are taking note of this strength in Crude.
Could this be War premium starting to be priced into this market? Or just Institutional Inflation bets? Either way Funds are loaded long and this time they have been right. We expect, and would like to see a selloff to relieve the over-bot conditions, and traders can use that weakness to position for a sizeable 2018 rally.
5) While we don't drink any, Coffee demand only seems to go in 1 direction, and that is up. While supply has been keeping up and putting a lid on prices, it is only a matter of time before something unexpected happens to cause disruptions.
Further, when looking at the annual High Low Ranges for Coffee, the Average Intra Year spread has consistently been 75 cents not only for this decade, but acctually going all the way back to 1973. Given where prices are currently positioned, we don't find it likely for price to trade 75 cents lower to 50cents, but rather believe it much more plausible to see prices trade up towards the $2 area.
Historically, Coffee has been prone to sharp 30,50, or even 100% rallies when conditions spark a rally. Look at some of these moves over the past 12 years.
While you are there, look at the flattening of the 23 month channel as prices wedge with Higher Lows and Lower highs since 2013.
Also note the High Volume Hammer in June of this year, followed by a Doji hammer in December. There is a floor of support building in the 110-120 Range, and historical price distributions are telling us to expect a 70 Cent range.
Therefore, we forecast Coffee to rally to the 175-200 cent range. However, if we are wrong here, and 2018 is another year of wedging, then prepare for blast-off in 2019.
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We wish everyone a Healthy and Prosperous Trading year in 2018.