First, Raoul Pal, founder of the Global Macro Investor research publication and former co-manager of the GLG Global Macro Fund, told CNBC's Fast Money on November 11 that we are one "global recession away from a tipping point." In the first video, he talked about the inverse relationship between oil and the dollar.
You've got the biggest-ever position in a commodity in history, I think six standard deviations above its mean was the long positioning in oil. Then you put that into context with the dollar rally, and commodities tend to act the opposite to the dollar. So if the dollar rallies, oil falls. So you've got this negative convexity that means that oil can fall dramatically and quickly. And it looks like it's only just started because the dollar could be about to break out in a major way.
The probability of a dollar breakout is very big. So, if that happens, then the chances of the dollar moving much more rapidly than we've seen for many, many years, and that would lead oil to go much further. So, prices in oil could go down to $30, $40 easily if the dollar moves in the way that I'm thinking it possibly will.
In the second part, he talked about the key levels to watch on the US Dollar Index (DXY), USD/JPY and EUR/USD.
So, if the dollar starts rallying further than here and takes out those highs over the last seven or eight years, you're likely to start unwinding this huge carry trade where people have borrowed dollars and bought assets abroad. If that happens then that can exacerbate the whole situation.USD/JPY
Dollar/Yen, really we're kind of off the map now. We're breaking all the chart levels. 120 is the real key level. Once we start breaking through that then there's a real acceleration.EUR/USD
Again, the probability is...if we start breaking these current levels, maybe 1.21,...what you get is a high probability of a liquidation event. For me it looks like the euro could go to 86 against the dollar...That kind of move probably takes two or three years.US Dollar Index and the Global Tipping Point
The magic level I think is 90 on the DXY. So if you break 90 on the DXY you start to break all the levels that we've seen. Much like the euro, it means that everyone who's been short the dollar for a meaningful time, all bets are off.
On my other blog News Moving Markets (see the feed on the sidebar), I posted (courtesy of ValueWalk) that Societe Generale strategist Albert Edwards expects USD/JPY (y-axis is flipped) to hit 145 by March. Like Raoul Pal, Albert Edwards thinks ¥120 is a critical level to watch on the chart.
|Source: Societe General via ValueWalk|
Here are a few quotes from Albert Edwards' report via ValueWalk.
“It reminds me of the 2006/07 period when falling US house prices and then widening corporate bond spreads were totally ignored by upbeat equity investors until it was too late,” he wrote.
Edwards says we could see the dollar/yen “crashing through multi-decade resistance – around ¥120.” This would be a significant milestone, and the well-known currency analyst believes it is entirely plausible once ¥120 is breached, a quick move of ¥25 could follow, touching the ¥145 level. This is the flash point, which could happen by March, that could force “commensurate devaluations across the whole Asian region and sending a tidal wave of deflation westwards.”
Recent related posts at News Moving Markets:
*Plunging Oil Price Triggers Warning Of Defaults And 'Distress' In The Energy Sector;
*JPMorgan: Oil Price May Sink To $65 Per Barrel;
*The Return Of The U.S. Dollar;
*A Once Bullish Crispin Odey Fears Recession In Emerging Markets;
*Albert Edwards: USD/JPY To 145 By March;
*The Opportunity In Japan Is Not Over;
*Dropping Oil Prices Could Hurt Texas Homebuilders;
*Japan Macro And Flows Trade Back On;