Dollar Delight at Equity Slump

Includes: UDN, UUP
by: The LFB

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 (NYSEARCA: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 (NYSEARCA: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

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