The US dollar could be headed lower, if analytics from BCA Research is correct. Utilizing both trend and fundamental models, the July 22 research report said the yen might have gotten ahead of itself as a policy divergence between the US Fed and their counterparts in Japan and the European kingdom differ.

BAC 7 27 AUD USD

BCA says British pound is a buy while separate algorithmic analysis questioned the validity of the “Brexit” sell signal

After the Brexit vote, several algorithmic trigger signals in some momentum models were sent. Shortly after the vote, separate analysis showed this is when the least reliable triggers occurred. Momentum models triggered before the Brexit vote became more significance in momentum model returns. This included the British pound, which was a short signal received after the Brexit vote. Separate analysis had indicated these algorithmic signals were called into question due to the lack of technical correlating factors. The simple moving average momentum methods triggered a sell, but the corollary market measures were tepid to a large degree. The consensus trade was opposite and had been short the GBP.

This leads to BCA’s research. For its part, the firm analyzes markets based on its Intermediate Term Timing Models. This method most interestingly combines a fundamental intermediate term look at the world as well as considering trend momentum using a 52-week moving average for each cross. Their (ITTM) is useful for providing indications on a 3 to 9 month time horizon.

Using this analysis, BCA thinks the British pound is a buy and that the recent Brexit sell-off is over. Considering the yield curve, they say British real rate differentials have moved higher while U.K. inflation expectations have been removed after the Brexit shock, the report said. Given this, the “massive collapse” in the GBP could have undershot fundamentals. In the long run the political cloud over Brexit, which is currently uncertain, must clear for the GBP to engage in a meaningful long term trend, BCA says.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

We respect your email privacy

BCA likes the Australian dollar on a mid-term commodity play, but likes oil in the long term

To understand the British pound better, consider the metals play in the Australian dollar and the current global benchmark for international trade. In part risk appetite among the consensus was driven by the Brexit.

BCA says the recent “sharp uptick in global risk appetite” is reflected in a desire for commodities exposure. This move has materialized in public view as reflected in the AUD/USD commodity pair. Australia as a sovereign currency play is considered a metals and commodity play to a degree. The other side of the relative value equation, the US dollar, is viewed in part as the global benchmark for trade.

On a macro level, BCA favors oil producers on a long-term time horizon. In the the longer term they like Canada and its dollar, considered an oil play to a degree, over less consumable commodities. This means the Australian dollar might not be as attractive, but in the ITTM analysis mid-term sweet spot, the currency pair looks interesting.

“The supply dynamics in the oil market are much more favorable than for metals. The cutback in global oil production is causing this market to reach a balanced state in the second half of the year,” the report said. “The same cannot be said for copper or iron ore,” metals which are considered more industrial and root economic in nature.

In the intermediate term, however, the AUD could see a move higher to the 0.8 level the BCA analysis says.

Separate algorithmic analysis indicates mid-term momentum models that fired near the Brexit vote are more valid in the AUD/USD currency pair than the British pound. Early analysis on July 11 indicated the GBP was among the weaker currencies to indicate short exposure. While all Brexit trade signals were suspect to a degree, the GBP short signal was previously identified as the weakest of these momentum signals.

BCA Yen USD 7 27

The US dollar could mean revert over the short term but will continue on its trend higher long term, says BCA

What is little considered is the major player in the AUD/USD currency pair – the fate of the US dollar.

Here long- and mid-term analysis differ. Separate analysis indicates the acceptance of the petrodollar, China gaining SDR access and moves to establish swapation centers around the world might all come into play long-term regarding the US dollar. Rumored moves by China and Russia to a lesser extent to create a currency based to a degree on physical commodity possession have been squashed, but this, too, is an interesting development to watch long-term if it materializes.

It’s not long-term that is entirely the focus for BCA. Currently the US dollar index and BCA’s fundamental models appear to be heading in opposite directions. By BCA’s method of looking at the world, the correlation divergence first occurred in between 2014 and 2016. Separate algorithmic analysis had indicated that many important correlation signals had previously broken down, due in large part to quantitative stimulus.

Also supporting the USD move lower is a potential interest rate play. Separate analysis indicates the markets are not anticipating a Fed move before the election, with December as the most likely point of potential volatility. BCA, for its part, notes the interest rate issue as potentially signaling a short-term move lower in the US dollar. On a longer-term basis, BCA thinks the dollar will resume its uptrend – interest rates will not stay at zero forever. The good economic news is that wage growth may propel the dollar higher, BCA says, noting a potential trend extension for policy divergence between the increasingly hawkish US Fed and the “helicopter money” experiment being bandied about mostly in Japan. This fundamental look is also linked with their technical viewpoint. Looking at certain deviation models, BCA thinks the US dollar may be headed lower over the near term time horizon.

Perhaps the most interesting currency relationship with the USD may be the fate of the Japanese yen. This long-term trend may be showing signs of short term exhaustion. The issue to determine if the short-term models fire, will the mid-term time horizons follow. Separate algorithmic analysis indicates that at this point that may be tenuous if one basis the analysis on the yen side of the argument.

Like the BCA recommended currency pair involving the AUD/USD, it is the dollar side of the equation that is less clear at this point.