USD Bull Market: Hanging By A Thread

The US dollar is the most important variable in macroeconomics and it has reached a critical juncture. After hitting multi-decade highs, the BIS labeled “global risk indicator” has fallen over 10% and is now on the verge of breaking key technical levels. In short, the USD bull market is hanging by a thread.

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Speculative dollar positioning was deeply caught off sides at the peak and has since flipped bearish. From the FT:

“Investment funds last year wrongly ramped up their bets on the greenback climbing, but according to CFTC data they are now net “short” for the first time since mid-2014 — after which the US currency went on a wild rally.”

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Conventional wisdom here suggests, you go long the dollar with a well defined stop…

And yet, structurally, the dollar looks as weak as it did back in the early 2000’s.

The parallels don’t stop there.

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Even though the dollar has not yet officially broken down against other major CURRENCIES, there are major breakouts in financial assets that are very sensitive to the dollar. Perhaps most importantly are the Emerging Markets which using the total return of the ETF $EEM as a proxy are breaking out of a decade long consolidation.

Even the much hated Caterpillar, a global economic bellwether, which had suffered declining sales for over 3 years before recently returning to positive sales growth has hit all time highs.

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The new all time highs in both CAT and EEM are reflections on the falling dollar and global growth which hit a post crisis high. More than 2/3rds of OECD countries are actually experiencing “accelerating growth”.

But global growth cannot continue without a response from the commodity complex (another dollar sensitive asset class) which appears to be finally emerging from a +5 year bear market. Gold, the ultimate short dollar trade and usually the first mover of any commodity bull market, bottomed in 2015 and has recently broken above its multi-year downward trend line.

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Copper and other base metals have been on a rampant run as of late as well.

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Here’s a chart of Alcoa, also breaking out of its post-GFC box.

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If that wasn’t enough, here comes the Fed to bottom tick commodity based inflation.

Fed trolling aside, while the dollar has not yet broken down completely, the price action across EM equities and commodities suggest that it is highly likely that the dollar has further to fall… BUT!

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But that does not mean the dollar is about to break down. I don’t think the Fed is aware of the full effects of its Quantitative Tightening (QT) program. As the Fed readies its QT, the US treasuring is planning to further drain dollar liquidity by issuing $500B of new notes by the end of the year.

So when you combine the falling dollar liquidity at a time when speculators are on the other side of the boat with a key technical stop, you get a no brainer trade. Especially if you are someone like me who is positioned for some of these longer term bearish dollar trades, it makes too much sense not to hedge some of that risk over the shorter term. As such, the Klendathu Capitalist has started buying dollar calls. We’ll see how that works out for him. Cheers!


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

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