Wednesday, September 26, 2007
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.
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.