Markets like to move against trades that seem like ‘slam dunks.’
By Christine Hughes, Canada. Chief Investment Strategist, OtterWood Capital:
As I‘ve stated many times this year, the direction of the US dollar is key to investing in the current environment and right now it’s sitting at a crossroads. The chart below shows how the US dollar index (known as the DXY and shown with support lines drawn in) is down slightly since March and looks rather vulnerable here. What the US dollar does is key to any enduring strength in the recent emerging markets and commodities rally.
The current consensus view on the rally in emerging markets and commodities is that it is simply a reversion trade with investors repositioning themselves after the Fed’s surprise move to not hike rates. Almost all market pundits believe this is a short-term rally that will end quickly. To me, it entirely depends on the direction of the US dollar.
A strong US dollar is very much the consensus opinion if you see the chart below. The top three trades are really all the same trade. US dollar goes up, commodities, emerging markets and emerging market currencies all go down. It is complete consensus and as we’ve seen over and over again, the market likes to move against trades that seem like ‘slam dunks.’
The ongoing consolidation in the US dollar is running out of time and one way or another, it will break out of the range. How could the US dollar break lower and turn all of the above consensus trades flat-footed? I believe the International Monetary Fund’s decision to include the Chinese Yuan in the SDR basket is one event that could break the strong dollar. By Christine Hughes, OtterWood Capital
So suddenly, the Chinese Yuan Gains “Staggering Momentum as Major Currency.” Read… Not the “Death of the Dollar” but “Death of the Euro?”