Let me start this morning by wishing all those “Jason” fans a very happy Friday the 13th! Interestingly there a number of analogies that can be drawn from that “horror franchise” as Wikipedia calls it and the current economic environment and yes, after all is said and done, Jason lives.

The tension in these movies comes as one by one the unfortunates are eliminated and the situation gets increasingly dire for the soon to be dead. It is a bit like that in the FX markets at the moment with news that Thailand, South Korea, Russia and the Philippines spent much of the week trying to prop up their respective currencies by purchasing dollars. This turned out to be about as successful as the survival chances of Jason’s next victim as the Buck ducked to 15-month lows during the process.

U.S. Treasury Secretary Timothy Geithner said on Wednesday that a strong dollar is key for the U.S. economy, a goal that may please U.S. consumers but that appears increasingly out of the control of the current administration. “We bear special responsibility for trying to make sure that we are implementing policy in the U.S. that will sustain confidence not just among American investors and…savers but investors around the world,” said Geithner to a group of reporters in Japan.

Geithner’s comments in Japan were nothing new: he has consistently expressed his belief (publicly at least) that a strong greenback is a major component of a strong, healthy U.S. economy. In recent months, many economists have predicted that a gradually depreciating dollar could boost demand for exports that become cheaper to consumers abroad. Geithner said in Japan that he sees “no contradiction” between the strong dollar policy of the U.S. and its policy of boosting exports.

Overall, the currency market saw a flat Asian session, but around the European opening bell, the dollar index started declining at a strong pace against the major pairs. However, this sell-off was somehow short-lived, since at market came to a standstill and had some attempts to turn around during the BoE Inflation Report. Looking ahead, the U.S. session will be influenced by the U.S. Veterans’ day and by the Canadian’s Remembrance Day.

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The United States dollar is currently so weak that people are beginning to ask if it’ll ever claw its way back. While the role of the dollar is sorted out, ETFs can help you play its present and its future.

Is the world finally losing its appetite for the U.S. dollar? Michael Schuman for Time asks the question. There are signs that we should be concerned:

November 9, 2009



BENNY AND TIMMY WANT TO PUMP YOU UP!

Nouriel Roubini is not a man who is known for mincing his words. “We have the mother of all carry trades,” he tells us, “Everybody’s playing the same game and this game is becoming dangerous.” There is a “wall of liquidity” sweeping the planet, pushing asset prices ever higher in one country after another. I wholeheartedly agree.

Investors across the globe are taking advantage of the ultra low interest rates on offer at the US Federal Reserve to borrow in dollars in order to buy assets like government debt, equities and commodities, in the process, as Nouriel says, fueling “substantial” booms that if not checked in time may sow the seeds of yet another financial crisis. This is a classic example of the so called “carry trade” in which investors borrow in countries with low interest rates to invest in higher-yielding assets.

What the Federal Reserve has control over is to keep rates artificially low and throw enough money into the financial system. However, what the Federal Reserve has no control over is where this money goes (in terms of country or asset class).

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Forex Trader Note: Near-term moves in Asian trading have not managed to get the four-hour global market momentum reads out of neutral mode. Most currencies are overbought against the Usd, on low momentum. Forex pairs will now require a boost from oil and S&P trade to hold the recent moves that came on thin order flows overnight.

The near-term technical reads show a market that is selling dollars on light volume. We will look for a reversal on euro, cable, and swissy before things can move too much further. Aussie and cad have not reacted to gold moving through $1100, and oil has not moved to back the short-dollar play. Neutral momentum and an oversold dollar, on a Monday, with not all major pairs aligned, is not a reliable read especially when Dax and S&P futures are not moving too far.

Asset allocation is the most influential on investment outcome. There have been growing signs that the worst of the global crisis might have passed. While the US dollar may continue to weaken and the US loses significance in the global landscape, an allocation to other developed markets is deemed necessary. After all, 76% of global GDP is outside the US.

The most popular ETF to provide global diversification is iShares MSCI EAFE ETF (EFA), which tracks Europe, Australasia and Far East Index of developed countries.

There's been a lot of press lately about the Carry Trade, and like all catchy trends in the investing world, by the time it's a routine fixture on CNBC and blogs, the smart money's been made and retail investors are left holding the bag when the bubble bursts (anyone recall housing 2007, oil 2008?). Conversely, the trend is your friend and given the continued decline of the US dollar of late, we may very well see this trend continue for months. In a flat or downward stock market following a 60% move from the bottom, the carry trade may be a nice place to earn a double digit gain in the meantime.

As outlined in this article on Currency ETFs, there are some currencies that are making great gains against the US Dollar and investors could have captured some nice low-correlation gains alongside stock gains in the past few months and this may continue.

What is the Carry Trade Exactly?

I featured a custom portfolio at the beginning of July, titled 'Scott's Alternative'. Below is the update for November if you were to base buy/sell decisions on the 200 day moving average at the end of October. All of the ETFs are above their 200 day SMA except for LSC.

The portfolio is updated once per month.

“There is no such thing as prices outside the market. Prices cannot be constructed synthetically, as it were…”

“It is ultimately always the subjective value judgments of individuals that determine the formation of prices…”

We have been asking ourselves this question for the last couple of weeks and getting rather apprehensive in the process; we may have cool heads but we are still human!

In the weekly Currency Thoughts review, Larry Greenberg reveals the detail behind one of the busiest economic weeks of the year. The U.S. turned its clocks back one hour to standard time this weekend.

Some markets but no major ones will be shut Monday for All Souls’ Day, and Japan is closed Tuesday for National Culture Day. Central bank meetings will be held in the United States, Euroland, Britain, Indonesia, Hong Kong,

The dollar has been decimated over the last six months as investors have piled into global stock markets. In hindsight, the risk seems to have been worth it, with stock markets in the US, China and Europe exceeding gains of 50% since the March 2009 lows. There has been much talk of correction or crash since stocks began to rise, to no avail. Markets, regardless of forward looking economic fundamentals, have continued to edge up.

In March 2009, the daily sentiment index showed there were 2% bulls. Today, we have the opposite extreme, with a 90% investor bullishness. As the dollar collapsed during the stock market rally, sentiment has also swung to the opposite extreme. Dollar bulls are few and far between, as indicated by the 95% bearish sentiment as of late September.

Both these individuals are Economic All-Stars here at Sense on Cents. Dr. Doom, Nouriel Roubini, and Wall Street’s top fixed income manager, Jeff Gundlach possess a contrarian view on the future of the U.S. dollar. While most analysts, economists, traders, investors, and speculators call for ongoing weakness in the greenback, Roubini and Gundlach believe the dollar will rebound and risk-based assets will retreat.

After a surge during the early stages of the financial crisis, the U.S. dollar has resumed its secular trend downward. Many applaud this dollar weakening as a way to spur exports and economic growth. Martin Feldstein, the chairman of the Council of Economic Advisors under President Reagan, has written that a more “competitive” or weaker U.S. dollar is good for America.

I cannot overstate how strongly I disagree with this position. “Strong Dollar, Strong Country” is more than a mantra for me, since economic history indicates that no country has ever achieved greatness, nor maintained it, by debasing its currency. Have you ever heard of a country in deep economic trouble because of a strong currency? In short, the value of a nation’s currency is a reflection of the perceived value of the country in the global marketplace.

“Action is purposive conduct. It is not simply behavior, but behavior begot by judgments of value, aiming at a definite end and guided by ideas concerning the suitability or unsuitability of definite means. . . . It is conscious behavior. It is choosing. It is volition; it is a display of the will.”

-- Ludwig von Mises