Trader Talk: USD and Inflation

The following is a chat between Rob and a couple of the many traders he helps coach. The chat took place the morning of July 12, 2023 and takes a look at the relationship between inflation and the USD, plus more.

Opinions are a very cheap commodity. Everyone, including myself has an abundance of them for anyone that will listen. Some accept other people's opinions, some don't. The key though, is if one is influenced by other's opinions to reach a decision, one most likely lack's conviction and the odds of success could be lower. Carefully consider opinions and make sure you are grounded in the substance and framework of your decision.


Trader 1, 6:44 AM
Gold pretty stout here. Seems inconsistent with GREAT, ASTOUNDING, SUPERLATIVE inflation news.

Trader 2
due to the move lower on the dollar I suppose... which is interesting as Dave and Rob pointed out Gold is supposed to be weaker for mid month seasonality so the premium going into that window could be a good thing

Same with OIL...

But shouldn't dollar be STRONGER too on lower inflation??

that's a good point... my guess would be the price action in the dollar right now is most sensitive to the action in stocks because it is being used as a safety trade.. so what's good for stocks is bad for the dollar. Lower inflation -> Fed easing up -> Stocks go up -> Dollar goes down. This is my best guess.

Yeah, some mixed arguments.
"But shouldn't dollar be STRONGER too on lower inflation??"

Rob
Actually the opposite. If inflation is lower...the dollar can sell off as there is no need for aggressive rate hikes
if the dollar sells off the market can move up
the dollar is the egg...the market the chicken... there had to be first an egg before a chicken if i understand biology...even if a chicken was grown in a lab...starts with some form of egg

Is that a function of the dollar being a safety trade or is there something else to it?

Rob posted chart:

anyway...if anyone has been paying attention to that leading indicator...it has been selling off

Really...I always looked at it like this. IF inflation is HIGH the dollar is worth LESS. IF inflation falls off, your dollar is worth MORE relative to other fiat currencies.

Well that is not what the chart says when you think about the Market Factors in Everything it Knows or can Anticipate

So it was in the fall of 2021 when inflation was getting more concerning
and we knew they would be raising rates in March of 2022
so look at the USD chart
as we got to Oct 13 CPI numbers that was the "event" that reset things to start reversing
as everything was "known"
and we could look forward to peak rates and eventual disinflation
eventual being the key word
market moves well ahead of that
so this past week... the soft landing thing and we might just be winning the inflation battle...shows the dollar trading down in response
I will hang my hat on that
I am expecting a further drop to 95 level which could take some time and without any massive disasters where a flight to quality could take place