Are we there yet?

-

It is easy to find anything negative to say about the US dollar these days. According to Bespoke Investment Group, with just over a week left to go in the month, the US Dollar Index is already down more than 1.7% on the year. That is a pretty big decline for a currency, but if you remember last year, the US Dollar Index kicked off 2017 with a decline of 2.6% in January, in what was its worst opening month to a year since 1987.

The chart below shows the US Dollar Index's historical returns for the month of January going back to 1968. As shown, the back to back 1%+ January declines has happened just three other times. The other three periods were 1972-1973, 1986-1987, and 2011-2012.


Well, there are a huge amount of people ready with “I told you sos” whenever the US dollar is dropping without knowing what is happening in the bigger picture. The silly memes on Twitter start to do the rounds again.

Fundamentally, I could quite easily build a bullish case as much as we could build a bearish case. Indeed, there will almost certainly be periods this year when the greenback seems to be in freefall and periods when the market is scrambling to buy. In the last week or so, sentiment has turned decidedly bearish of the Dollar.

Sentiment is fairly easy to recognize, but much harder to measure reliably and trade. The general sentiment in the greenback has been bearish from last year. Yet if you were trying to long into the overly bearish sentiment you would have steamrolled. Markets have a nasty habit of catching the most people off guard at the wrong time.

Essentially, the next couple of weeks or so are important for the US dollar. Some ingredients for a dollar rally are apparent. If the dollar can do no more than pause in the next week around current levels, then we suspect that what is happening is that the dollar is simply pausing before renewed selling comes in. However, if the dollar begins to rally, and there is an awful lot of short dollar positions that need to be bought back.

What does this mean in terms of trading views? We think that at a minimum, those who are short dollars should be cutting back or going flat/neutral. If the greenback is going to rally, it has to do so now. If the dollar starts to trade lower, then my bet is wrong. If the dollar just languishes around current levels for the coming weeks, I am probably wrong.

I am a long-term bull on the US dollar. In the meantime, I will take trades in any direction as long as I see an edge.

Popular posts from this blog

Same old same old

-
Image
It is easy to get sucked into anything. Who cares? After a long time in the markets, it really does not matter to me whether this is a bubble or not or a new crash will come tomorrow. Forget about the sales pitches, it is more important whether I make money or not in any situation. I can be a bull or bear running different strategies at the same time. Outlook or opinion pieces that we hear out there everyday provide a framework to view and guide things. It is important to have a disciplined system with cookie cutters and work within it and continue to adjust the portfolio if necessary as market conditions evolve. Volatile assets can produce above-average returns, but often expose the investor to deep and sometimes frequent drawdowns. That creates more opportunities to sell the investment and miss out on the gains. What about Bitcoin or whatever? I read articles about Bitcoin on both ends every single day. The claims of a Bitcoin and cryptocurrency bubble are nothing new....
Read more

The US dollar comedy

-
Image
As I scan the news articles everywhere, I have noticed almost everyone and his dog is becoming increasingly bearish on the US dollar. The US Dollar Index was one of the major disappointments of 2017, depreciating by 9.0% and putting in its worst performance since 2003. Effectively, the dollar will get thrashed again in 2018 is the popular view.  Some of the analysts argued that all good news is already priced in the US dollar. It makes sense from the fundamental perspective. However, lots of things make sense in the investing world until Mr. Market decides to prove rationales flawed. Just ask the old timers who have seen enough in the markets. According to the latest Commitment of Traders report, released on December 29 by the Chicago Futures Trading Commission, large speculators reduced their net short positions on the US dollar. I do care about fundamentals. Over time, the macroeconomic fundamentals will reassert themselves. The key is interest rate different...
Read more

Investing in Hedge Funds

-
Image
The fears of hedge fund troubles will never go away. Most experts agree that hedge funds are part of the solution for any well-diversified portfolio. But still, some local private and other institutional investors are reluctant to use them, even if their regulations allow. For some, hedge funds are synonymous with “risk”. Indeed, hedge funds have been featured regularly in the mainstream news, and not surprisingly much of the reporting in the media has been negative or rather sensational in my view. Of course, a few investors from my meetings are ahead of others that they have already gained some real investment experience with hedge funds. Hedge funds may invest and trade in many different markets, strategies and instruments with various risk characteristics. Hedge funds employ innovative trading strategies. Their strategies can include taking both long and short positions, using leverage and derivatives. Some may only consist of a small investment team or may depend on...
Read more