Perspective on the USD: Trying to Make Sense Of the Dollar

This is a long overdue post that I have been planing to write for about two weeks now. I have been mentioning at few occasions my stance on my blog and also on other blogs such as Tiho's or Tony's.

The question that puzzles me is "Why isn't the USD rallying" and also "Why is the Euro levitating?".

About the Euro, I think it can be attributed to the "HOPE strategy" which consists of buying risky assets while hoping/wishing that the central bank will save you. I don't see any other possibility here.

Our Anonymous friend has made a few points on Tiho's post (above), which are valid, but I think there's much more to it.

1. The fact that treasuries have had such a massive rally, with the dollar staying so low is also interesting. Because foreign investors need to buy USD before they can buy US treasuries, right? There has been quite a lot of money pouring into the treasuries, and yet, the USD is at rock bottom.

2. While the equity have been correction — they are still way too high, and there's still too much bullishness in the equities markets in my opinion — commodities have failed to fall meaningfully, some still making all time highs, gold being close to $2,000 and the highly speculative is still at above $42. These show that speculative mania is still unabated.

3. The real estate bubble has popped in Australia, and speculators, commentators, strategists have been in complete denial about this. When the Central Bank is forced to cut interest rates to close to zero to try to save the banks — try to, not manage to — the AUD will collapse (aim at least 30% drop before the bottom, and that's the optimistic forecast. The pessimistic one will be a 50% drop).

4. Finally, people have been piling into the JPY and the CHF, and when the price action reverses — we have extreme bullishness on both of these currencies —these trades will have to be unwound which will create a massive USD rally, which in turn should create a major leg down in risky assets.

The bottom line and short summary here, is that while many think that the fact that the USD has started a rebound is a bullish sign. And you'd have understood that to me, it's actually the exact opposite: the fact that the equity markets have managed to drop significantly without a USD rally is a very bad omen. And the next leg down will probably be occurring with the USD rising while at the same time the RISK OFF trade is on, which will decimate not only equities, but also commodities.

The current set up will be deadly, and will be available somewhere near you, very soon.

Full disclosure: I have been short the EUR/USD since 1.48 and short the AUD/USD since 1.08. I just opened new short positions on the AUD/USD at 1.07 — so as you can see, I put my money where my mouth is.


Tiho said...

Hey man, nice to see you put your money where your mouth is. I wish you good luck with those trades!

My own opinion is still the same. I have feeling that you are betting on a repeat of 2008, and there just won't be one. This was actually obvious to me long time ago, as I predicted everyone would be yelling "It's Lehman 2!" and they have been since the start of August. Soon it will be obvious to majority of investors that it isn't.

I am not saying we cannot sell off more from here, but only Treasury yields are sinking, not risk assets. Of course that is because phoney crook cheater banker are buying bonds as Bernanke promised to buy them back through QE3 at higher price. You see Bernanke is actually bailing out banks "under everyones nose" - there is no deflation actually!

Australian Dollar investors aren't as easily shaken out of the commodity bull market this time around, as they were before. We are going to need more worrying stuff than "EU break up" or "Greece is bust" which is the main story week after week. If China implodes tomorrow, than that is a different story altogether and even I might short the Aussie for a trade.

On top of that, the market is actually net short the Euro as of last Tuesday and I think even more so since than, so you might get squeezed sooner rather than later. Who knows...

Market will decide in the end. Good luck buddy!

pej said...

Let's see dude :-)
I'm positioned anyway, and rolled my options to the 21st of Dec

Tiho said...

Well... Euro is now at $1.40 and Aussie is approaching $1.05. We have had heaps of time expiry since you posted this, so that together with a huge short squeeze would have eaten all your profit...

Are you still short? Or did you closer earlier?

I still do not see the 2008 crash in the Aussie?

pej said...

Yes, still short.

The AUD is back at 0.97xx and the EUR at 1.32xx.
Unfortunately, I had to roll some positions and I just closed some of my EUR options at the US close on Friday as they were set to expire in a few days.

I hope it will bounce a bit so that I can reopen them at a higher level :-)

Tiho said...

Bad luck buddy!

You know what is true? if you keep making the same call over and over again, like in 2009, 2010, 2011 and now in 2012 - eventually you will be right in say 2013 or something.

Too bad you missed the biggest bull market of all time in the Aussie Dollar!

pej said...

You're right, I missed the bull on the AUD. But I don't regret it, you can't be positioned on all the markets.

Did you buy NetFlix and benefit from the 1000%+ rally? Do you have regrets about it?