The World’s Most Popular Trade May Soon Explode

The previously down-trodden, despised dollar has seen a hockey-stick-like surge since mid-2014. Now the entire world is bullish on the dollar. And kicking the euro around has come to be more popular than soccer. Which triggers all sorts of alluring thoughts and promising ideas in the minds of contrarians.

But before you read the article below, and before you follow any alluring thoughts, let me remind you of what DoubleLine Capital’s Jeffrey Gundlach said on March 10:

The dollar strengthened today, and it is still accelerating, and that is being interpreted as negative in certain risk markets.

The dollar has been a world beater, and will continue to be a world beater until it becomes economically too painful, and maybe that’s what the stock market doesn’t like.

It would be a bold contrarian move to short the dollar, he said, “but I say ‘don’t do it’, because sometimes the consensus is right.”

At least for a while.

With this in mind, enjoy Jeff Clark’s article. It sheds a lot of light on just how precarious the perch is to which the dollar has climbed.

By Jeff Clark, The Growth Stock Wire:

The U.S. dollar rallied again last week – tacking another 1.78% onto its extended rally. The current rally is the most dramatic rise we’ve seen in the buck in the past 20 years. And, like most big rallies in just about any asset, traders are piling into it in anticipation of further gains. But the dollar’s parabolic move is likely coming to an end.

Take a look at this long-term, monthly chart of the U.S. Dollar Index plotted alongside its 50-day moving average (DMA)…

The dollar is up 25% in the past eight months. That would be a terrific gain for a stock – though not uncommon. But it’s an amazing gain for a currency – which tends to be much more stable. And traders are continuing to pour into the dollar.

Interest rates in several European countries have dipped into negative territory – meaning depositors are now paying banks to hold their funds. Meanwhile, there’s a growing conviction that the Federal Open Market Committee (FOMC) is going to start raising rates here in the United States. So money is flowing out of Europe and into the U.S. That action strengthens the dollar and weakens the euro.

And currency traders are lining up to profit off it. The most popular currency trade on the planet right now is to be long the dollar and short the euro. But the markets don’t usually reward popular trades. We’ve seen this sort of lopsided currency betting before. And the trades almost always break down.

For example, in May 2010, Greece was threatening to default on its debts. Spanish banks were in trouble. Ireland, Italy, and Portugal were facing liquidity issues. So currency traders were rushing to sell euros and buy dollars. The dollar rallied 7%-plus in May. I warned the trade was going to blow up. And it did. The dollar fell 10% over the next two months.

The same thing happened in 2011. Greece was once again threatening to default. Spanish banks were in trouble. The European Union was on the brink of collapse. Traders rushed into the dollar and it gained 5% in May 2011. But it gave up all of those gains in June.

Fast forward to today… Europe is a mess. The FOMC is looking to raise U.S. interest rates. Traders are piling into the long-dollar/short-euro trade – even after the dollar has experienced its biggest rally of the past 20 years. If there was ever a situation in which the market had a chance to punish the most traders… this is it.

I told you the dollar was going to break down a few months ago. The dollar has gathered even more strength since then. And it’s possible the dollar could squeeze a little higher in the short term from here. But with the trade being so popular today, and with the dollar rally so far extended, the most popular trade on the planet is setting up to explode. By Jeff Clark, The Growth Stock Wire

The US economy hasn’t been firing on all cylinders, recently. But now there’s a new development. Read…  Economy Finally Reaches “Escape Velocity,” Heads South

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  14 comments for “The World’s Most Popular Trade May Soon Explode

  1. DollarWatcher says:

    The dollar could go much higher, with the Grexit looming, hence the euro unraveling, capital flight out of Asia, an upcoming devaluation of the yuan, war threats from Ukraine and the M-East into Asia (Japan-China) and the rising Dow Jones. A stock market crash would make many stocks much more attractive, which would intensify any flight out of negative-yielding bonds and currencies, into dollar-denominated assets. It’s all about survival and confidence.

  2. Michael Gorback says:

    Maybe this steep rise is the blowing up of the Greenspan/Bernanke put and the end of the USD carry trade. The mo-mo traders will always ride along and overextend a trend. Since it’s a currency trade the participants are probably all leveraged to the hilt as well. Will we see debacle like the Swiss franc? I doubt it. It will be a correction on the way higher.

    Look at the global stage. Where’s the largest most stable (relatively speaking) place for a huge amount of money to flow? Where can you put money without having to pay for the privilege? A negative-interest Bund? An Italian 10-year paying 1.27%?

    The one thing that gives me pause is that GS is predicting the euro at $0.80. They are encouraging the Muppets to continue to pile into the USD/EUR trade so they can be slaughtered. But after the correction the dollar will start moving up again because money goes where it’s treated best. Now that the US is one of the few developed countries NOT doing QE it’s the dollar.

    The dollar is going to have one last hurrah. Eventually the dollar will go, but it will be the last currency standing. The EUR, JPY and the RMB will go first, squeezing even more people into dollars and into a final super blow-off.

    Finally, I can’t help but think Clark is talking his book. He’s a known gold bug.

    • Vespa P200E says:

      Good points. It seems like there is this undeclared currency war and race to devalue.

      Yen has been gapping up from 0.75 in 2013 to parity in 2014 and now 1.2 to USD. Euro went from 1.4 Euro to USD as recent as Nov (when I was in EU) to 1.1 headed to parity. Chinese too is busy uncoupling from USD and devalue to boost the exports as many export steam engines like furniture and shoes are struggling in Pearl River delta and closing factories (and workers).

      So USD needs to weaken but alas the world lost faith in Yen, RMB, Euro and Swiss Francs FIAT money and crowding into USD expecting further strength with announced rate hike in June. And yeah who wants to get in front of the Fed or fight the Fed? So muppets are piling into the USD bandwagon but alas there may be tears soon as Fed may be forced to resort to more QE like the rest of the world CBs and attempt to devalue or the very least burn the currency speculators in their won crowded trade game.

      Let’s just hope the currency wars don’t turn into the trade wars and another world war as today’s environment is becoming more like the 1930’s. And yeah guess who will come out ahead if there is big war – banksters of course.

      • Intaglio Press says:


        And, if a majority of production has been off-shored and the dollar would not need to be weakened on the behalf of the less numerous exporters or re-exporters. And, it would suck for those out of work to lose purchasing power.

        Do better business, not screw the currency holders.

    • Wolf Richter says:

      Yellen opens mouth, dollar plunges 2% against euro.

      There is still humor out there. It’s just not the kind of humor we would like.

  3. Vespa P200E says:

    Ah the good ol easy money USD carry trade… The USD Yen carry trade was the rage few years ago and now we have the speculators lining up one rather lopsided “easy” money USD Euro carry trade.

    And why not since Janet announced and Fed doves signaled that the all mighty invincible Fed orchestrated (AKA manipulated with lies galore thanks to BLS) the monetary policies to reach low 5.5% unemployment rate, and that the Fed plans to abandon the years of ZIRP and starting raising the interest rate with will further strengthen USD.

    But I think another round of QE 4 is on order rather than the rate increase as the economy teeters on recession and the multinationals are screaming for earnings relief due to strong USD. Well this just might unleash the so-called “smart” money” getting margin calls on heavily leveraged USD carry trades which won’t be pretty.

  4. sid says:

    “Yellen opens mouth, dollar plunges 2% against euro. ”

    genuine question
    are they allowed to bet on rates ? stocks ? gold ? etc
    it seems to me , here in europe and in the states , that whenever one of our
    leaders, elected or otherwise ( europe ) speaks , they can move a market.
    so whats to stop them just leaking or speaking to make themselves even richer ?

    • Wolf Richter says:

      The good people in Congress, at the Fed, etc. are beyond the law legally while they fulfill their official functions. Insider trading at the Fed? It looks bad, but it isn’t illegal. Same in Congress.

  5. Julian the Apostate says:

    I’m going to have to get more popcorn – and some Diet Coke to wash it down. Mr Clark nailed that one. Lately market watching is like watching 24–a cliffhanger every day…

  6. mick says:

    No dog in this race, but I fail to see how higher rates can lead to a weaker USD, especially with the Euro being devalued, along with pretty much every other currency.

    • Bill says:

      I agree, Mick. The series of devaluations of world-wide currencies along with QECB (by the European Central Bank) pouring 60 billion euros a month into the system can only lead to a stronger dollar as time goes on.

      Also, as per the chart in the article – WTH? – using the 50 day average as a measuring stick? Using the 100 or 200 MDA makes more sense as a standard for comparison. By that measure, the 10-15 % above average index value is not out of line in light of the world wide devaluations taking place.

  7. NotSoSure says:

    Talk about timing. Yellen today put a bullet in the US Dollar.

    • Michael Gorback says:

      Apparently it was only a flesh wound. Back up this morning and stocks open red.

      Maybe this is the new half-life of Fed jawboning. The algos let it rip on the news, then the carbon-based life forms catch up and say “Wait a minute. Did they just say things look bad?”

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