The US dollar is rallying like it is 1997 – a time when “the Rock” was the height of fashion and greenbacks were the only game in town.

Every morning we are awakening to a stronger US dollar. The action has been vicious and one directional.

The fact that the US is heading into the tightening stage of their economic cycle, just when the rest of the world economy slumps, is causing a repricing of most currencies. Few other developed nations are withdrawing stimulus. In fact, most are either on hold or easing.

In the mean time, although the US economy is not robustly expanding, the stage is being set for interest rate policy to normalize. Ever since the credit crisis of 2008, the Fed had been one of the most aggressive Central Banks – instituting three different rounds of Quantitative Easing programs in a bid to get growth to return. Now that the economy has finally shown some positive resiliency, the Fed is keen to walk policy back to non-crisis levels.

This raising of interest rates, along with the rally in the US dollar, is fully justified and expected. Even though rates are rising, they are still at rock bottom lows.

US two year treasuries are barely yielding over 50 basis points.

But this 50 basis points is still a big positive when compared to the negative rates that investors are earning in most of Europe. Let’s see… 50 basis points, an improving economy along with a rising a US dollar or negative 8 basis points with a Central Bank that is actively trying to lower the Euro due to the fact that the European economy is slipping into a deflationary disaster. It seems pretty easy to understand why investors are flocking to buy US dollars.

This US dollar strength is weighing heavily on commodities.

There are some other factors that have contributed the recent commodity swoon, but the US dollar strength is causing a good portion of this weakness.

So far the precious metals have not broken to new lows, but with this US dollar strength and rising interest rates, I am not sure how long they can hang in there.

I am especially worried about silver. It is exhibiting relative weakness and is challenging long term support.

I have no idea if the support is going to hold, but I do recognize that it is an important level. Given my belief that the US dollar is going to continue to rally for some time to come, the odds favour that at the very least, the market is going to take silver down below this level to test the resolve of the longs. Eventually I want to return to the long side of the precious metals market, but until they take out this level and shake out the weak longs, I am going to simply watch from the sidelines.

Rarely do markets offer nice clean technical patterns, so my suspicion is that we will break $19, maybe accelerate to the downside for a day or two, but then that ultimately that break down will fail and we will return to the $19 support level. Until then there is nothing to do.

In the short run the US dollar has rallied a long way and is due for a pause. Although at that point it will be tempting to proclaim the end of the US dollar bull move, this move will most likely be a multi-year affair. The trend of fanny packs for men unfortunately lasted long enough for even the Rock to wear one. I suspect that this will also be the case for this US dollar bull move.

Bunds – was that the top?

Yesterday the German bund market pushed up to new highs, but then failed badly.

Contrary to prevailing wisdom, I steadfastly believe that QE programs are bond bearish. Given the ECB’s recent action, I am bearish on German bunds. I have been waiting to climb aboard the short side, and yesterday’s action is all I need for confirmation.

I shorted German Bunds and will continue to add to the position in the coming weeks.

It’s snowing in Calgary

When it comes to the grains, this year has been a perfect growing season for most of the United States. The same cannot be said of Canada. We have had a cold summer, and it is looking like a cold fall.

Yesterday it snowed in Calgary.

I know that my American friends think that this is par for the course in Canada, but rest assured that even Canadians don’t expect snow in September.

When you combine the terrible Canadian weather with the declining prices for most grains, it is no wonder that Input Capital has sagged badly over the past week.

The company has been busy marketing to institutional clients and receiving positive feedback, but the macro factors are overwhelming the short term price action.

I was lucky enough to peel some off before the recent decline. In the coming months if the stock continues to sag and I can pick some up around $2, I will reload back to my full position.