Will a Dollar Rally Stop the Asset Reflation Story?

It's so amazing how the rally we've seen in stocks, commodities, emerging market assets and gold are all dependent on a single factor: the US dollar weakness. I mean, it has been a no-brainer. US dollar down, bonds down, everything else up. Now with the dollar index rallying 0.70% last night, voila! We had this massive reversal in stocks, gold and commodities. Now with so much of the asset reflation story hinged on just this one phenomenon, could a rally in the US dollar force a massive unwinding of trades in the related assets?

The US dollar index is now trying to peek above its major downtrend line, and a rally could bring it to $79 to $80. Still, this is considered a reversal process and reversals don't go straight up from the bottom. So I'd expect $80 resistance to be strong. So while a rallying US dollar may be a concern in the short-term, it may be a welcome development in bringing out a healthy correction before the next leg up in the asset reflation story. While the model portfolio is short, it is just a trade to take advantage of the potential swing downwards. I would look to re-accumulate long positions at relevant support levels.

Disclosure: None

Comments

[SkiDad:]

Mr. Chan,

Short term? I think in light of the secular trend in gold, yes. However, in light of the rising inventories and speculative bubble in oil, no.

Then there's the substitution of the dollar for the yen in carry trade which I agree, could valut the USD index to 80 near term. But, I think the substitution for carry trade currency coupled with the fact that the dollar won't be replaced anytime soon as the World reserve currency could place a support under the dollar, again near term.

Your thoughts?

Oct 27 08:37 AM

[Papaswamp:]

With $123 Billion in Treasuries going this week and the Fed probably buying half (again) the monetization of debt won't sit too well, at least it doesn't with me. I would think more will leave the dollar for elsewhere.

Oct 27 08:51 AM

[Terence Chan:]

a lot of factors to take into account for the dollar... really can't pinpoint what will influence it either way as there is too much to consider (carry trade, interest rates, trade deficit, etc). it's up in the as to which factor is really valid. i'm looking at it from a technical perspective, momentum still calls for a weaker dollar longer-term and prices don't just reverse trend from the type of damage the dollar has sustained... we'll see..


On Oct 27 08:37 AM SkiDad wrote:

> Mr. Chan,
>
> Short term? I think in light of the secular trend in gold, yes.
> However, in light of the rising inventories and speculative bubble
> in oil, no.
>
> Then there's the substitution of the dollar for the yen in carry
> trade which I agree, could valut the USD index to 80 near term.
> But, I think the substitution for carry trade currency coupled with
> the fact that the dollar won't be replaced anytime soon as the World
> reserve currency could place a support under the dollar, again near
> term.
>
> Your thoughts?

Oct 27 12:08 PM

[Albertarocks:]

Technically, the relationship you see is bang on the money. And you bet, any dollar rally will stop the stock market rally dead in its tracks. I see the dollar retracing (bouncing) to as much as perhaps 81. If that happens, we're almost assuredly looking at a significant market correction. But I think you already said that? Yup, that's what you said, and I agree with you completely.

Oct 28 01:17 AM

[Carl Spackler:]

Right on! The dollar looks like it is ready to bear rally all the people who have jumped on the bear dollar train. I was hearing about all these FX living room traders going short the dollar and I had to wonder if everyone was on board the dollar bear trade, who could propel it further? The answer ended up being that no one was left to move it further, so we have the basis for a nice short term dollar rally. Question is how much pain this dollar bear rally will inflict. I hope it goes pretty far, so gold can see a nice correction and provide me with a great price to increase my gold holdings. I like gold long term, but the same was going on with that market - too many gold bulls on the trade. Smart long term gold buyers are all hoping for a pullback under $900.

Oct 28 10:14 AM

[Albertarocks:]

Carl, you're a mind reader. I couldn't agree more with you... on all counts. The only area where we appear to differ is that I'd be stunned if gold were to drop below $980. Having said that, does that mean I expect the dollar rally to be short lived? Yes. But the chart of the dollar gives me the impression that it could bounce for several weeks. On the other hand, the gold charts don't see gold falling for that much time. So I'm not sure how that conflict would resolve exactly.

Oct 28 06:49 PM