US Dollar Gaining Fair-weather Friends

US Dollar Gaining Fair-weather Friends

Pacifica Partners’ Financial Post Weekly Column – November 28th 2010

This and other articles also available online at: Financial Post & Pacifica Perspectives blog

Several weeks ago, upon seeing an analysis of the data that details the speculative long and short positions in the US dollar by currency traders, it put into perspective how one sided the Long Commodities & Long Equities & Short the US Dollar trade had become. According to the data as compiled by Credit Suisse First Boston, net speculative positions were the most skewed they have been since October 2007 – just before the financial crisis began to gain speed and unravel the equity markets around the globe.

The data, made clear that given how “tilted” the consensus had become against the US dollar, a correction was an increasingly high probability event. That is to say, if this relationship was going to hold and the consensus bet of piling in against the US dollar was going to prove itself to be ill advised, then something would have to give in the currency and equity markets. As per our comments earlier this month a likely hotspot was Ireland. So far the thesis has proven correct. The Euro has retreated almost 8% against the US dollar and equity prices have been under pressure. Along with the retreat in the Euro we have observed European and other major equity markets weaken. The chart above shows the US dollar index vs. the MSCI EAFE index which reflects equity prices in Europe, Australasia, and the Far East (EAFE).

It is said that the job of the stock market is to disappoint the most investors it can. One way this is done is to lure many investors into a one sided consensus trade such as betting against the US dollar and investing in emerging market equities or in Europe. In a relatively short amount of time, the hysteria around QEII policies of the Fed have been replaced with a whole other set of concerns.

For now “Risk is off” and the US dollar should continue to strengthen as the flight to safety continues. For many investors, the lift in the $US may have come as a surprise. However, we only have to remember that investing alongside an overwhelming consensus opinion in the financial markets can often prove hazardous to an investor’s portfolio.

Legal Disclaimer

This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.

Copyright (C) 2010 Pacifica Partners Inc. All rights reserved.

View All
Start a Conversation