Why The U.S. Dollar is Devouring Emerging Market Currencies (w/ Raoul Pal & Peter Brandt)
RAOUL PAL: What are you seeing in the FX market, because I'm mesmerized by the chart of the euro right now? PETER BRANDT: I will tell you, I'm looking for you to share your wisdom on here and let me tell you why. Because, yeah, I'm a technician, but I'm not deaf to everything that's going in the world. I still live here on this planet. I'm looking and going we've got a Fed that just is into QE infinity, the word infinity has now been adjusted by the US Fed. They're throwing everything on here. Part of me goes, wow, that has to lead me to a bias that the US dollar could get really clobbered and I tried my hands here in the last week or so with the long side of the euro, the Euro FX, I got run out on stops for a breakeven trade today, but behind the scenes, I'm thinking, wow, this can't be constructive for the dollar for the Fed to just flood the globe with greenbacks. Then I look at the Euro chart and I go, we ever get under 105, 80 cents, here we come. In the back of my mind, I'm aware of the fact that the 50-year trendline in the euro currency-- now, people will say, well, the euro hasn't been around for 50 years, how do you get that? Well, you get that because prior to the euro, you can put together a trade weighted basket of the old European currencies, and which become a proxy for the euro. You track that back into the '70s, we have a 50-year trend line that has held on a number of occasions in the euro currency. Well, we've tested that hard here this year, we take out 105 in the euro currency, and boy, that's all she wrote. Then I really have to turn and say, I don't know the story of the end the dollar, but I have to be bullish on the dollar. RAOUL PAL: You see, I hear the narrative of the Fed printing. I hear it. I see the Fed doing stuff. I look at the charts and I look at the charts of stuff like the euro, which seems like it's forming this huge and powerful triangle, whichever way it breaks is going to be a massive move. Because of the 50-year trendline, that would be a spectacularly powerful move should it move lower. PETER BRANDT: It's one I don't want to miss. Let me tell you that. RAOUL PAL: I'm looking at that and hearing the narrative, and I love it when the narrative is the opposite of what the charts are telling me. I look at corrective price action of other currencies, have you ever looked at-- you can't trade it, but I don't know if you ever looked at ADXY. It's the Asian currency. That has got this massive multiyear, multidecade head and shoulders top. I look at that, it makes me go, same thing. I look at that. I look at those commodity charts. I look at the head and shoulders in the S&P. I look at that euro chart, and I'm like, it's just like it's got a massive dollar rally and a debt deflation written all over it. If everybody in a debt deflation owes dollars, that's why the dollar goes up simply and you can print as many as you want, but nobody's got the cash flow to pay it back. PETER BRANDT: It's just a good old fashioned short squeeze, is really what you have and you got-- the entire world's commerce system is in the short dollar position. You get the entire global economic system short dollars and all of a sudden, you hit some key trade points and certain things happen on the fundamental side on what's going on in the world and you've got to scramble to cover short dollar positions. RAOUL PAL: I'm going to ask a really hard question because nobody can get this one right. What is the longer term chart of dollar/yen to you, up or down? PETER BRANDT: Confusing because it's a triangle and I hate triangles. Raoul, we talked about that. I tend to like patterns when the breakout of a pattern really is through a horizontal line, diagonal lines tend to give you big false starts, tends to give you further morphine, and will take you out. I'm confused on the on the yen. The yen chart has absolutely been a nightmare to me for a long time, but I do see the coil. The yen is coiling up. Boy, I tell you, it's the old analogy of you take a beach ball and you push it down under the water, and you try to hold it there, hold it there and you hold it there, sooner or later, that thing's going up. RAOUL PAL: I looked at this, and I look at that euro chart. I look at that ADXY chart, and I look at the commodities chart, and I'm like, dollar/yen could get to 200 which is what again, it's the opposite of everybody's narrative. Now, I could be dead wrong. I could be building a false narrative myself, but I just look at it because of that coiling pattern and the fact of it hits low a while ago. It looks like it's building strength for dollar/yen to go higher. PETER BRANDT: I think you're right. We take out this year's existing high in dollar/yen, certainly you want to place your bets on a currency that's got a lot of green ink and that's the US dollar, but we continue to coil and as you know sometimes, coils can be very difficult. You can do all kinds of weird things in coils, you can have false breakouts and do what the old chart masters called an end around or an end run, you can do all kinds of sneaky things. In terms of dollar/yen, I'd rather just sit back and wait, say, okay, let's declare yourself and I'll try to make sense of that. In the meanwhile, there are certain places where I definitely want to be long dollar for instance, in the Mexican peso. A Mexican peso looks to me that no matter what the dollar's going to do, peso looks like it's going to go down, dollar's going to dig in on the peso, as it has really for the last throughout history. Yen, I want to wait. I want to keep my eye on that. It's been in this coil that's done nothing really for last five, six years but my eye is really on the euro currency. That's the chart I want to look at. That five level is going to be key. RAOUL PAL: The other two charts I want to ask you in FX lands before we move on to fixed income is the long term charts that dollar/Brazil is spectacular. PETER BRANDT: Oh, and there's the futures contract there. That's what I love about it. You put me into a world where I've got a futures contract to trade. That's marvelous. That was a really clean breakout and a lot of people were scared of the breakout there because they're looking at the negative carry of the trade. They're looking at the big interest rates down in Brazil, so they're short Brazil. Now, they're loaning dollars so they got to pay the differential, the interest rate differential but when you get a currency to move like that, I don't care what the interest rate differential is, you're going to make money on it. I look at that and I just think that that's a market that's going to go a very long way. I'll tell you, the price level I think that we go down and of course, this is I think we'd go down where the real, a good guide to 10 cents, 15 cents, something like that. I think that's where we're going. This is a big trend. Now, it's late in the game. We've come a long way. We're at 19, we were at 25 not very long ago. Nevertheless, I do not want to own money sitting in Brazil. RAOUL PAL: What about the RMB? PETER BRANDT: I think same thing, you had it same thing with India. You just really want to own the dollar. You want to own the dollar in those particular currencies which really comes back to the fact that I'm split somewhat as you acknowledge in terms of the dollar index, in terms of the euro, there are certain currencies where it's a no-brainer and that is being long dollar against peso, against Brazil, against South Africa. Those are plays that makes sense. As a trader, I always am thinking if I'm going to be long the dollar, I want to be long the dollar against the weakest currency there is. If I want to be the long metals, I want to be the long the strongest metal. I don't want to play catch up. I don't want to think, well, gold has had a big move, but silver hasn't had a big move, so I'll buy silver. No, I want to be long where the strength is. There's already some currencies where the dollar is in a very strong trend. That's really where I want to be.