US Dollar at a Crossroads

Markets like to move against trades that seem like ‘slam dunks.’

By Christine HughesCanada. 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?”

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  3 comments for “US Dollar at a Crossroads

  1. Vespa P200E
    Oct 14, 2015 at 2:16 pm

    Boy talk about lemming crowd trading at work here…

    Alas what IF USD in “descending triangle flag” pattern (I think from graduate investment class I took 20 yrs ago under TA guru) takes a dive dramatically (though it can also rocket up as well) blowing up the short EM trades?

  2. rich
    Oct 18, 2015 at 6:17 am

    China, Russia, Norway, Brazil and Taiwan have been dumping multi-billions of dollars’ worth of their US debt holdings (US Treasuries). Meanwhile, Belgium’s U.S. Treasury Holdings reached $359.9 billion in August 2014, but by August 2015, those Treasuries holdings had been reduced to $110.7 billion.

    On the flip side, the Fed, through its QE buying programs, now holds nearly $2.5 trillion in Treasuries, or about two times as many as China. The Fed created dollars, to buy these Treasuries, out of thin air. So will the Fed have to start buying even more Treasuries as foreign entities continue to sell, and, if the Fed does that, won’t that devalue the USD, and force countries sell even more US debt, rather than hold on to an investment that is losing value?

    The Fed will have to raise rates, if it expects countries like China, Russia, Norway, Brazil, Belgium and Taiwan to get back into the Treasuries buying business. However,
    if the Fed does raise rates, emerging market currencies could get crushed, and a countries may have to sell their Treasuries and buy their own currencies, in order to keep their own currencies for losing even more value.

    It’s hard to see how all this plays out, but one thing is for sure, foreign entities holding US debt, have got to be taking hard looks at assets other than the US dollar, the most manipulated major currency in the world. Ironically, when all these foreign entity debt sales are converted to dollars, those dollars could be coming back home, and, when they do, they could be buying US real estate and stocks. In the case of China, this is already happening.

  3. Dan
    Oct 21, 2015 at 6:20 pm

    $USD looks weak here and likely the FED gets more dovish over next 6 months. But the demand for dollars may be held up as it is not the debt owned but the loans denominated in $USD that has already inflicted pain on EM businesses. And if it moves lower i think you its likely it wont be a sustained move. Demand to close out those positions could become very powerful even with no hike if global growth slows more than consensus.

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