Wednesday, September 26, 2007

Weakly dollar closes

So will this be the week that The Economist slaps the dollar on the front cover? Macro Man certainly hopes not, as he is positioned for further dollar weakness and would prefer not to face such a formidable obstacle to further profits. The euro-centric DXY came within tickling distance of its all-time lows yesterday, though it has subsequently backed off a smidge.

Some market technicians are now calling for a respite, given that the buck appears "oversold." And while a pause in dollar weakness, particularly one that keeps The Economist focused on other things, may certainly be refreshing, it would appear unlikely if Macro Man's reading of the current market environment is correct.

Simply put, he does not feel that the market has the short dollar trade on in meaningful size-certainly not in the same magnitude that existed in 2003-04. Part of that is a result of current low-volatility environment, which encourages relatively rapid profit-taking. Indeed, there has been plenty of evidence that some euro longs have been taking money off the table this week. More strategically, however, dollar weakness hasn't really resonated as a thematic macro trade, other than in brief pockets, for the past couple of years.

After all, if you're a macro hedge fund, why screw around with a currency that trades on a 5% or 6% annualized volatility when Turkish or Brazilian equities can move that much in a day? Macro Man's sense is that that may be changing, and that once month- and quarter-end passes on Friday, these funds may be prepared to expend more of their risk budgets on giving George Washington a smack.

And while history may not repeat, it quite often rhymes. Macro Man has observed an interesting phenomenon in EUR/USD which suggests that any near-term pullbacks may be very shallow indeed.

In 2003, when EUR/USD posted its first weekly close above 1.10, it rallied 9 figures in more or less a straight line before stalling.
Later that year, when it registered its first weekly close above 1.20, it ended up rallying another 9 figures in a straight line before losing ground.
In late 2004, EUR/USD registered a weekly close above 1.30 and rallied above 1.36 without registering another weekly close below 1.30.
Last week, EUR/USD registered a weekly close above 1.40. If history repeats, or at least rhymes, then we could see 1.45 or higher in fairly short order.

Focus this morning is on an announcement from SAMA. To say that Western analysts and fund managers, including Macro Man, have no special insight on this would be an understatement. Indeed, the banks that Macro Man speaks to cannot even agree whether this is a regularly scheduled announcement or something extraordinary.
The last few years (China, Russia, Kuwait) suggest that a change in currency regime is not announced in a scheduled press conference, but rather comes as a surprise announcement or simply via market operations.
Macro Man certainly hopes the Saudis do nothing; any profit-taking on SAR longs as a result could provide an interesting entry opportunity. Short USD/GCC offers very attractive option-like payouts, and Macro Man would be remiss in not slapping some on when the negative carry (e.g., the option premium) is low.


Charles Butler said...

On the same note, 5 cent drops off previous highs have all been low-drawdown entry points on the EUR/USD (if not always providing instant gratification). Half cent retracements currntly seem to be all the rage.

Bill aka NO DooDahs! said...

"After all, if you're a macro hedge fund, why screw around with a currency that trades on a 5% or 6% annualized volatility when Turkish or Brazilian equities can move that much in a day?"

Hmm. Inherent leverage on the currency contracts can be much higher than one could get on a loan to buy foreign equities, and the currency futures are more liquid?

Macro Man said...

On a relative vol basis, G3 currncies have still been playing for the amount of leverage one would need to take to make it worth allocating loads of risk (as opposed to, say EM equities) has been relatively unattractive.

A higher expected volatility changes that equation...

Linda P. said...


When is the SAMA announcement? If you could post any link to it, that would be greatly appreciated.

I love your blog, and read it everyday. I rarely comment, because it feels like I am raising my hand to ask a question in Nuclear Physics 401, when I'm a Sociology major.

Linda P.

Macro Man said...

They said nothing- basically the peg stays, they may not follow the Fed, they're ready to defend the peg, etc.

On the other hand, the CB governor did say that the peg offers 'flexibility', though no one seems to know what that means. For some reason, there is no write-up on Bloomberg or Reuters, which probably confirms how little was ealistically to be expected....

Corey said...

Full disclosure, since I've been posting my book on gold, I've gone flat today. I will go long again on a sharp price drop or on a new high if it happens soon. The combination of overbought commodities and equities markets has me leaning on the conservative side until things play out. My goal is to avoid losses in gold if the theme trade of selling assets and going long yen makes a comeback. Something tells me the credit troubles are not over.

Macro Man said...

Interesting...thanks Corey. That seems to fit in with the consensus-ish view that the dollar needs a breather, as reflected by the congestion either side of $730 in gold.

Leon the Academic said...


Why did you choose EURUSD, against say AUDUSD?

In an earlier post you said that EURJPY is the turbo-charged anti-dollar currency pair, so why not EURJPY instead of EURUSD?

Sorry if these questions seem to basic to you.

By the way, I read your blog everyday. Great blog.

Anonymous said...

doesn't ahmedinejad and all the theatrics around the UN (plus the will he or won't he call an election story in the uk) limit the risk of a dollar cover?

but i had better amble over to the economist's web site to see ...


Macro Man said...

Leon, EUR/USD is the most-traded FX rate in the world, and for better or worse the euro has been viewed as the anti-dollar for quite some time. While I continue to view EUR/JPY as the turbo anti-dollar at present, it ahs not always been that way; as such, historical comparisons of the sort made in this post would be kind of meaningless.

Brad, to be honest, I am not sure if markets really care too much about Ahmedinejad's performance. Only one person even mentioned it to me, and that was in a giggling, "can you believe he said that" kind of way.

Of course, there's nothing to say that the Economist won't deem him, or the events in Burma (when did it switch from Myanmar?), or politics in Britain or Japan as more worthy of attention than the poor old dollar. Fingers crossed...