King Dollar? Russian Ruble, EM Currency Weakness May Not Be Over, Says John Roque

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Stock markets around the globe have come under pressure in recent days with a collapse in the Turkish lira and vulnerabilities in the emerging market space.

John Roque at Key Square Capital Management recently told Financial Sense Newshour that the dollar is likely to strengthen further and this will cause weakness to spread into oil and commodity-sensitive countries like Russia. Here's what he had to say along with a few key charts he discussed on our podcast.

Dollar Set to Strengthen Further

The dollar is showing strength against most currencies right now. The price action for the euro-dollar chart shows a sharp break below what was two months of support.

The euro is going to go importantly lower against the dollar, Roque stated, in part because of interest rate differentials clearly favoring the United States, and too much complacency on the euro and potential growth in Europe.

Source: Key Square Capital Management. Past performance is no guarantee of future results.

Long-Term Consolidation in Oil?

Roque has put together a chart for Brent crude, and it’s indicating that the strong rally off the 2016 lows may be in the process of ending.

After hitting a low of .10 in 2016 to a high of just over , the rally so far has been impressive, Roque said, but momentum is now slowing and the price of oil may be undergoing a long-term consolidation similar to what took place during the 80s and 90s.

Source: Key Square Capital Management. Past performance is no guarantee of future results.

“This in and of itself is not a sell signal,” Roque Said. “It's just an amber flashing light that says it's not likely that the price levels for (Brent) can be sustained at this level.”

Russia Facing Headwinds

We saw fireworks last week with currency weakness in emerging markets, Roque noted, and subsequently we’ve seen some recent deterioration in Russian markets.

Based on his historical analysis, Roque stated, this likely means that this market is commodity sensitive and probably will also likely be affected by the anticipated weakness in oil.

The index was down 7.33 percent last week, he noted. The 1000 level is the key level for this Russian Trading System index, Roque added, and below this point, which probably won’t hold, the Russian market has some important downside in the cards.

Source: Key Square Capital Management. Past performance is no guarantee of future results.

The Russian ruble is showing significant weakness against the U.S. dollar, and based on this chart, we’ll likely see further weakness ahead as well. We had two bases through last year and this year, and we’ve now accelerated through both of them.

Source: Key Square Capital Management. Past performance is no guarantee of future results.

“If you can just imagine it looked like prior to the last 3 days, the setup was just so technically beautiful,” Roque said, “The setup suggested with great certainty that the move would be impetuous, sharp and quick to the upside. … My suggestion here is that the ruble will weaken further, weaken importantly and the dollar will get to a new all-time high versus the ruble.”

Markets Driven by Machines

Roque also explained how a large portion of capital is now being managed purely by machines running on auto-pilot and not people, which is having a distorting effect on the market.

Investors are complacent right now, Roque stated, and those owning one of the major indexes will probably do OK going forward. Eventually, though, the distortions caused by mindless algorithms running the market will hit home.

“I think it'll be an uncomfortable education for nearly everybody when that happens,” Roque said. “I'm not good enough to know when it's going to happen. I just hope that my eyes are open when it's occurring so I can avoid getting run over.”

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