Wednesday, September 16, 2009


Is the dollar going down forever? Well, to paraphrase Benjamin Franklin, nothing is forever except death and taxes, but it certainly seems that the DGDF crowd is having their day (week? month? quarter?) in the sun.

The normative question of whether the dollar should go down "forever" is an emotive one; Macro Man is generally sceptical of such arguments, particularly in the current context when the US current acccount deficit (usual source of DGDF $ bearishness) is eminently reasonable by the standards of the past decade or so. Moreover, a number of the currencies that have performed best against the buck recently (here's lookin' at you, NZD and ZAR!) haven't exactly been paragons of balance of payment virtue themselves.

However, while market focus is usually (and justifiably) on the flow of currency movements (i.e., portfolio flow versus the US need to finance an ongoing c/a deficit), it seems as if the current bout of dollar weakness may have more to do with a stock adjustment...i.e., Asian and Middles East CBs reducing the share of dollars in the reserve bounties that they've accumulated over the past year or so.

Throw in a step-shift in the perceived equilibrium level of USD/JPY, thanks to DPJ laissez-faire, add a dash of flow recycling from Asian CBs standing in the way of overdue currency appreciation (so what else is new?) , and throw in a pinch of dollar-negative seasonality, and these are the things of which market trends are made.

EUR/USD has broken up to new highs for the year, courtesy of both public and private-sector flow. Near-term resistance lies at last December's high of 1.4719 and the Sep '08 high of 1.4866; above those levels, there's quite a bit of fresh air.
The breakout was confirmed, or indeed foreshadowed, by therally in precious metals a few weeks ago. Gold is not far below its nominal high of 1032 (though obviously well below its real high), but there appears to be more near-term upside in silver, which has broken and held the key $16 level.
There are still a few holes in the DGDF story, however, particularly if it's one predicated on a cyclical rebound. Base metals have been taken to the smelter recently (boom, boom), whereas one might reasonably expect the rising tide of a broad-based DGDF-deval to lift all boats...even those made of base metals. The chart of aluminum is indicative of the complex.
Similarly, oil (as measured by CLZ9) is off its recent lows, but doesn't exactly scream "breakout!!!" Now, this may be down to promised OPEC supply, or it may be down to spec limits. But in a world where the dollar truly is "going down forever" and inventories are sharply off their highs (though admittedly above long-run averages), one might reasonably posit that crude would have put in a better show.
So how are we left? Much as it pains Macro Man to say it, it looks like we may well be at the mercy of his old adversaries, the FX reserve managers. Should they continue their recent behaviour and consistently buy EUR/USD in the open market, the private sector will happily piggy-back and a trend will be born.

Should they pull the bid and start selling (because as you know, punting someone else's currency for a percent is a vital part of FX reserve management), well.....then we might find that the dollar going down isn't forever after all....


Nemo Incognito said...

Not to mention HSI broke a key retracement level. Looks like Dylan Grice / Albert Edwards are going to get their bubble.

Crisis Management said...

MM, not sure this new coalition is exactly laissez-faire. There was a lesser noticed story today about the incoming financial services minister, who has said:

“Unbridled capitalism led by the U.S. has spread throughout the world, leaving behind people’s lives,”

Even more strange, last year he was quoted by Nikkei as interested in "abolishing Nikkei 225 futures trading" according to DJ. I was unable to find any further information on that one.

Macro Man said...

Compared to the LDP, they are definitely laissez-faire when it comes to the yen. Were the old boys still in power, we'd have been treated to a battery of comments on how they are watching FX movements carefully, how volatility is undesirable, how they will mull action...and we may have even had a few drivebys from kampo.

DPJ has basically said "DGDF...what can we do?"

Nemo Incognito said...

Has anyone seen any footage of a certain Goldman economist talking about yen? I'm assuming the prop desk is on the other side of that recommendation to clients.

Crisis Management said...

I meant laissez-faire as a double entendre to say that they're not capitalists. There is more than a hint of shifting alliances and nationalism in this new yen policy from what I can tell.

Nemo, yes, O'Neil said recently it should be at Y195. JPM says "such yen
appreciation should be short-lived."

Anonymous said...

Not forever –until elections are secured. It could cost some gold. To Carry on. If the thingy gets too nervous then a leggy down perhaps a swap tick wide. But not into campaign. Such is the way of this new win win market.

Anonymous said...

UST's remain resilient despite the DGDF talk. Maybe a better than expected TIC flows report tonight may spark a rebound in the dollar.

Anonymous said...

Both stock indices and "the" dollar trade look to be in the daft stage now. What do elliot chaps call it? Wave 5. The behaviour seems quite consistent.

Not that I am any elliot fan, but especially on the dollar (and some stock indices) it sure seems like that.

Is there a hint of mania now? Stocks correct shallower and shallower with more aggressive retracements. I think "Miss the boat" mentality is now in full force for both markets.

Anonymous said...

Anon 10.38,

Second that.

Especially, some minds wonder USD might, once again, show its safe haven status given ongoing escalation of Israel-Iran showdown in ME.


Nemo Incognito said...

Given ME problems and the pretty insane technicals on gold this might just be worth jumping in, tinfoil hat or not.

Fully Inv said...

Hello boys,

Saddle up for the year end rally.
Coming into september everyone was fearing a pullback, but the fact is that many institutions are underinvested. With the final months of 2009 approaching they are sitting on loads of cash and even larger ytd underperformance, this is what get money managers in trouble. Remeber what happen in the end of 1999 when money managers were in a similar positions.

hard money said...

the dollar HAS BEEN going down "forever". when the federal reserve was created in 1913 the dollar was $20.67/oz. today, it is over $1000/oz. of course all fiat monies are falling (fiat money always goes to its intrinsic value), they are just falling at different rates.

Anonymous said...

I second Fully Inv. The price action smells of upside fear.

But What do I Know? said...

To paraphrase Winston Churchill, the dollar is the worst currency--except for all the others.

Anonymous said...

Truly, I feel sorry for all the long only funds.

They got relatively (and absolutely!) smoked last year, and they will be smoked again this year.

You wonder if the equity mutual fund industry has much of a future.

Fixed income should be a lot brighter.

MW said...

"Has anyone seen any footage of a certain Goldman economist talking about yen?"

And they are now pitching 10y call spreads, FWIW. Can someone explain how you can be bullish on Treasuries and dlryen at the same time?! That is an interesting correlation trade...

Anonymous said...

For the last commentator:

4. Bullish USTs but Long $/JPY trade?
So how does our view of falling US yields, encapsulated in our decision to go long 10Y USTs tactically yesterday, sit with our long $/JPY strategic trade? Especially with rate differentials playing a key role for the Yen, as we have highlighted above. The Fed not hiking rates before the end of 2010 remains our US team’s core view. We think the widening output gap and disinflationary pressures will be a significant dynamic keeping the Fed on hold for an extended period of time and US rates we think will reflect this.
However, we are also still holding on to our long $/JPY trade. The rational for launching this as a longer term ‘strategic trade’ as opposed to our short term ‘tactical’ trades reflects our belief in the fundamentals of the trade, but less certainty over timing. Rate differentials may yet still move in favour of the trade further out as US yields reprice after hitting bottom while Japanese yields should remain relatively anchored. Japan with its weak fundamentals and pronounced deflationary pressures stand out even in G3 space. The increased bifurcation of Japan and US financial conditions (tightening for Japan and loosening for the US) continue to skew recovery prospects towards relative improvement in the US compared to Japan. The continued strength in JPY only seeks to reaffirm this conclusion.
Positioning is another factor to consider. Markets have seemed to have gotten moderately bullish Yen in recent weeks as indicated by our Yen sentiment index. Until recent weeks, the index has been in Yen bearish territory for most of the year. Positioning currently therefore is not an obstacle for moves higher in $/JPY.

Anonymous said...

nice thoughtful answer 2:26... but im w 1:12

look: on jpy
mkt sold off, usdjpy sells off
mkt rallied, usdjpy flat to down (recently)

+ usdjpy is a dog sandwich... its definition has changed. and the reason is: that china fx crew is selling $ to buy, jpy, eur, gold. fundies are not going to be the primary mover in this mkt.
also, if you like the deflationary theme for 10yrs, jpy will rip. we just saw it happen 10months ago...

on 10 yrs
im cool w playing deflation w 10yrs. but only short term.
here is why.
if the mkt drops. you will get your 10yr bid. but it wont last, bc as we've seen ben b will drop another qe nuke on the mkt to restimulate inflationary efforts. he's not going to dabble again w alphabet soup, hes gonna continue to use the big guns. which will steepen the yield curve 'ultimately'.

im not a big fan...
however 'jim o' did call +gbp on the bottom and it was very impressive


Anonymous said...

im not a big fan of the trade (not jim o)

leftback said...

Was that a "boom-boom" like Basil Brush, MM? The awesome diversity of your cultural references is what keeps me coming back to this blog. Oh, yeah, and the charts... poetry... hip-hop...

Pretty much agreed with all this from 3:37:

on 10 yrs im cool w playing deflation w 10yrs. but only short term. here is why. if the mkt drops. you will get your 10yr bid. [the "flight to quantity" trade - also unwind of carry will support both USD AND JPY, like last yr].

but it wont last, bc as we've seen ben b will drop another qe nuke on the mkt to restimulate inflationary efforts. [yes, but things have to get a bit dire again before they do it, they will want to generate some panic buying of Tsys at some point]

If there is one thing we have learned it is that once this mkt has a direction it can trade one way for much longer than expected in a way that defies logic and analysis [viz: Feb-March 6, and July-now]

Nemo Incognito said...

Even Brazil is going apesh!t. Wow. Looks like Tudor are going to get paid this year since they are calling this year end rally as of September.

leftback said...

Blow off top into expiration? I mean LEHMQ is having a massive day, MM, up another 18%...

Crisis Management said...

Past 1 AM in Tokyo and these guys are still talking about the yen. Time for bed Mr. Fujii. Also, Rtrs says "Iran attack: Israel ex-min sees end-yr deadline."

Anonymous said...

reasonable video on china, pearl river delta

Igor said...

Goldman wants YOU to buy US Trsys so they can re-deploy their money into something that has positive carry without government directives

Short term the market is a popularity contest, long term its a weighing machine.

Short term, the government can slow down an economic decline and will be very popular for trying

But long term, government spending is not the source of sustainable growth

Trsys have probably rallied about as much as they can (more QE efforts will steepen the curve again). You can't pay $50 billion in bonuses clipping coupons.

And "long term" (months?) the weighing machine will kick in. The world is not coming to an end, but its not growing very fast either

Igor said...

oops -- I meant 500 billion in bonuses, not 50.

I was channeling Nancy Pelosi and the 500 million she says would have been lost (out of 300 million population) if not for government spending

leftback said...

Igor, surely there will be no more QE? If they extend QE then it really will be DGDF.

Are T-bills really at 9bps today? What is out there?

Anonymous said...

extra-ordinary t-bill supply being cut back by treasury. barclays thinks this will drive down fed funds effective to 5-10bp range.

if you think thats the case, then 3M dollar libor, already the lowest out there, can go further down a few bps. makes funding in US pesos even cheaper.

Anonymous said...

thank you for comments. where consensus earnings for next year now? i think $90. so S&P 1 year forward is on a 8% earnings yield? where are 1 year risk free yields, 1%? that seems like a lot of risk premium. so until rates move higher i can't see this market coming off. why shouldn't the market be back at lehman level? other measures ranging from the ISM, credit spreads etc are. as the recent survey showed, people biased towards caution. the pain trade is up. clearly if things continue like this, rates have to move up. that will hurt. anyone have any suggestions on how to take out affordable optionality on a rate hike?

Anonymous said...

Hey, were all those accumulated IOU some Tsys later on (same goes for IOU some AIGs, LEHMqs etc but not for phyzz PMs...)- already delivered?

Ashraf said...

MM, I am a firm believer of what master tapereader George Douglas Taylor talked of "market engineering"
in 1945.

I supect NZ is a market makers currency (they probably control it wholly) and it moves in waves continuously for an extended period.
If you see the charts you will find the NZD spiking up to 2500 pips in a matter of hour and come back to the original level.

The whole operation looks like PacMan being unleashed to trigger margin calls, entry stops, stoploss and trail stops. It can happen only when the currency is in the control of a strong hand.

Your thoughts in general on "market engineering" and insight on Kiwi, commanding such a premium because of the country's ability to produce milk, will be greatly appreciated.