From time to time, the investment world takes something as accepted wisdom and just runs with it. For whatever reason, investors seem convinced that the US Dollar is destined to go higher. I’ve heard lots of smart opinions why; interest rate differentials, GDP growth rate differentials, “The Dollar Milkshake Theory,” “Prettiest Body in the Morgue” and the “Fear Trade.” Over the past two years, we have seen the most powerful set of circumstances for a sustained dollar rally that we have seen in many years, including; interest rate differentials, flight capital from China, substantial capital repatriation due to new tax laws, faster US GDP growth rates, QT vs. QE globally, tariffs making US products more attractive to purchasers, net US oil imports collapsing, etc. Pretty much everything that could go right for the dollar has gone right for the Dollar, meanwhile, the dollar has been range-bound. While I’m an investor, I’m always a trader first. If good news doesn’t make something go up, bad news may make it go down.
I have always believed that during volatile days, we get to see the true nature of the markets as leveraged risk positions unwind. The last few weeks have seen a number of big down days—yet the dollar has not caught a bid. You could almost say that no one cares for Dollars—this is quite a difference from prior periods with big down days. Could the Dollar actually be topping out?
I suspect that as we get into 2019, we’ll learn that many of the most powerful underlying trends supporting the Dollar will become less supportive. From the Fed putting a pause into rate increases to a slowdown of economic growth as interest rates take their bite; the Dollar’s supports are slowly being removed. I am not the type to make bold bets on currencies—I own a basket and the Dollar is one of many currencies I own. However, for those who are overweight the Dollar, I would point your attention to all that has gone right and how little the Dollar has appreciated. I would also point you to how overweight speculative positions are in the Dollar. Could the surprise trade of 2019 be a decline in the Dollar?
Naturally, the question is, “If I sell the dollar, what do I sell it against?” I don’t have a good answer for you. I’ve done a few global tours of the world’s currencies while sitting at my trading desk. Technically speaking, they all suck, but some suck a bit less than others. In any case, I have increased the non-Dollar weighting of my basket in the past few days. I don’t want to name them all as I suspect I’ll get laughed at. All global currencies have flaws, but so does the Dollar. At the same time, there are a whole host of businesses (particularly commodity producers) that do well with a weaker Dollar—many of these have been crushed in the past few years. Could they be the real winners if the Dollar weakens?
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Disclosure: Funds that I manage are long and short various currency crosses