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Born and raised in London, I have been trading and investing in financial markets for the past twenty years. My focus has been particularly on the interest rate markets and I formerly ran the fixed income group in London for a $20bn US hedge fund, trading 2% of all customer trades in the UK gilt... More
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  • Brief Follow-up on US Dollar, and on the Hard Asset Trade 2 comments
    Jun 5, 2011 11:00 PM | about stocks: UUP, GLD, USO

    I reposted recently two of my writeups to Seeking Alpha – a post on on the medium-term bullish case for the US Dollar, and for being extremely cautious on the currently fashionable long hard asset trade.

    Posts submitted are evidently edited however they wish without checking back with the author before publishing.  And so my tentative “Is the US Dollar bottoming” became a rather more definitive “The US Dollar Is Carving Out a Base”.  I think my original version expresses rather better both my intention, and the logical implication of my analysis but since the post has been up for a couple of days and I have only now found the time to write this clarification, it is better to post this as it is rather than revise the publication of the edited post.

    I should also emphasize the need for clarity in time horizons.  If one is expecting a new long-term trend one has a choice in the general case between being too early, and too late.  Too early with a small and manageable position is perhaps not a bad thing provided that one does size the trade/investment properly and considers the potential for a blow-off ending to the old trend, as well as the possibility that one quite simply be wrong.  And for the remainder of the position, perhaps it is better to have some confirmation – both from a near-term fundamental, and from a sentiment/chart perspective.

    My best guess is that we have not yet seen the turn in the broad dollar.  I would expect (if I am right about it being not purely a risk-off trade) is that it starts to develop closer to the end of 2011 and the beginning of 2012.  I would expect the turn in the dolalr to be associated with a turn in the relative interest rate cycle (in favour of higher dollar rates).  That said, it is quite possible that we see some dollar pairs bottom earlier – USDCAD for example is one prime candidate.

    Regarding sentiment, and the propensity of even ‘smart money’ to be wrong at turning points, I found the following quote from Hugh Hendry to be very germane to the current juncture.

    If you want a definition of safe harbour, safe investment, I think it only has safety if it has a degree of contentious nature to it.  That’s why I worried, there’s nothing contentious in wanting to short treasury bonds, there’s nothing contentious in wanting to short the dollar…  Religion is a function of repetition and a passage of many many years.  10 years is effectively sufficient to create a cult, a cult of belief, in capital markets.  And we’ve had 10 years where the dollar has sucked.  And the opposite of that, is antithesis: gold has been phenomenal.  You have, 10, count them, 10, 10, 10 consecutive up years in gold… it’s not contentious.  Emerging market is not contentious.  The formidable strength of the Chinese is not contentious.

    Stocks: UUP, GLD, USO
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    "My best guess is that we have not yet seen the turn in the broad dollar. "
    I think we had it today. And it is going to an unbelievable strong rally. Check out how quick and how strong:

    6 Jun 2011, 03:54 PM Reply Like
  • Cantillon Blog
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    Author’s reply » Thank you for the comment, Ker - I shall take a look at your blog post shortly.


    I do agree that the magnitude of the dollar rally could be quite shocking. I'd almost rather not say at this stage just how high the projections for many pairs ultimately go. The interesting thing is that I do think these are justifiable based upon long-term fundamentals, particularly if we see the very substantial commodity correction that I expect (for reasons discussed in another post).


    I think right here, right now USD/SEK at 6.1891, USD/NOK at 5.3805 and USD/CAD at .9808 are at pretty compelling entry levels for the medium to long term.


    It will be interesting to see how sentiment evolves as these moves unfold. I was on the Goldman call when they re-established their bullish stance based on long-term fundamentals. It was quite remarkable to hear them say "when we turned bullish in 2000, we expected a top by 2010-2012. We're right in the middle of that zone, but we don't really see an adequate supply response so we remain bullish". The whole call, and questions that followed were very focused on the micro nitty gritty without anyone questioning the basic thesis. So I do not have a very good feeling about the future of the energy longs.


    Also interesting is that I have yet to see any research from commodity bulls addressing the pricing threat posed by either a rise in real rates, or from the supply response we see unfolding with shale oil and with forecasts for increased tar sands production in Canada. The bulls seem to be saying, well so long as real rates stay low the bull market should be intact. But in practice I am not sure things work quite that way.
    6 Jun 2011, 10:40 PM Reply Like
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