Dollar Delight at Equity Slump

The next leg higher in dollar index valuations will happen if the S&P fails to get above 1060 (that seems a lot further away at midday on Friday than it did at 08:30 EDT), and oil suffers the indignity of a failure at 79.00. The move to a longer-term currency trade is made easier by the cost of carry in an currency trade not being an issue right now, because swap interest rates are low.

A play on the PowerShares DB U.S. Dollar Bullish (UUP) offers a longer term option to holding spot, (or if you are still a believer that equities will drag the buck lower, the PowerShares U.S. Dollar Bearish (UDN) can be used).

The question is whether the long-term move off historical lows will be heard by those consumed with the dark stories of dollar depression; the bottom line right now is the dollar is set for a technical bounce, and the global economy requires a strong dollar to more easily make the next leg higher in business cycle trade.

It has taken 12 months to get the liquidity into the global market in an effort to revive the business cycles. Most of it was USD liquidity and will like take another 12 months to get back in-house. In that time, it may not come as a surprise to see the dollar index forced higher from tests of the 75.50 support area. And maybe it will not be the Fed and Treasury doing the pushing.

Central banks and sovereign wealth funds protected their dollar holdings at these 75.00 levels in Nov 2007 and again in Sep 2008. With stability in interest-rate markets now in place and the removal of dollar liquidity, along with global intent to reverse the quantative easing programs, it seems unlikely that a move below 75.00-72.00 on the index (or the equivalent of a 10% increase in major pair dollar-based vales) will easily happen -- not unless the S&P quickly moves to test 1150 in the next month of trade.

Disclosure: Clear Of Positions

Comments

[morph366:]

You make a couple of assertions that have not supported.
When you say that "the global economy requires a strong dollar to more easily make the next leg higher in business cycle trade." it is not at all clear whether that is either required or what the policy-makers want to see happen. As long as the dollar doesn't plummet or become too erratic the conventional wisdom seems to be that the dollar should remain "cheap" to promote US exports.

What is the reason behind invoking 1150 on the S&P 500 and why does it have to be next month?

Oct 31 11:10 AM

[Albertarocks:]

>The next leg higher in dollar index valuations will happen if the S&P fails to get above 1060 (that seems a lot further away at midday on Friday than it did at 08:30 EDT), and oil suffers the indignity of a failure at 79.00.<

That was the first sentence in this article and the first wrong sentence to boot. I only said that for impact... it wasn't really fair to the author. But that sentence is very wrong in that it implies that the dollar responds to what happens to the stock market. It's probably only a rather unfortunate choice of words, because the author is dead right about the relationships.

But it's absolutely the other way around. The equity markets, indeed darned near every market in the world, now respond to what the dollar does. The dollar is now in complete disconnect from any form of reality, and it will absolutely adjust to correct the error of the FED's ways. But "which direction" is the question of the day, isn't it?

The banksters know how to capitalize handsomely either way, so that's a wash and we can throw that factor out. In fact, most investors who participate or who only read on Seeking Alpha also know how to capitalize handsomely if they knew the direction. The problem is that those who are in the know not only know the direction of the dollar, they cause the direction of the dollar (for now) while we readers don't know the direction. Or do we?

Nope! Not at this point in time, but we know where it's going to end up eventually. So in the meantime, the direction of the dollar bears more watching even than the direction of the stock markets because right now they're so tightly and firmly locked in an inverse relationship that nothing else ultimately really matters. But there are now very serious arguments for a temporary deflationary case (I never thought I'd be saying that) that we should consider as being more valid than many had previously thought. Because if the dollar continues to rally, as I suspect it will for a few months, the stock markets will react accordingly. The evidence is growing, so maybe we should expect the dollar to rally and hold onto our shorts. I know I am. And I can't see myself changing my shorts until sometime in the spring.

Oct 31 06:44 PM