“When all the experts and forecasts agree – something else is going to happen.”– legendary Merrill Lynch strategist Bob Farrell
I have a question for you this morning. Do you know anyone who doesn’t think the US dollar is going to rise in the coming year? Anyone? Anyone? Bueller? Bueller?
This has to be one of the most crowded trades out there. Not only are there absolutely zero speculative shorts, but the US dollar longs are feeling especially confident lately. The great Bank Credit Analyst (BCA) has a recent blog post titled “U.S. Dollar: The Only Game in Town” that epitomizes this attitude.
I understand the US dollar bulls’ argument. It makes perfect sense. I don’t have any legitimate reason to fade their line of reasoning. But I am worried that it might be fully priced in. The other day my wife’s grandmother phoned from the nursing home wondering if she should be more short Euros or Yen. You see, her best friend Ethel had recently made a bundle shorting Yen, but the recent weakness in the Euro had my wife’s grandmother convinced that it might be time to short Europe. Her other friend Mabel thinks they are both insane and that they should just stick to buying US Dollar index futures. And why not? Look at the chart of the US Dollar index. It has been straight up for the last 8 months.
The speculative short position in the CME currency futures has bounced off the record large position at year end, but it is still at monster high levels.
There is a tremendous amount of speculative US dollar longs out there. Every hedge fund is stuffed to the gills with short currency positions of every stripe.
The idea that the US economy is going to continue to dramatically outperform the rest of the world, and that the Fed is going to crank rates while everyone else is lowering them is pervasive throughout the fast money crowd.
I am not sure where the surprise is going to come from. I don’t know if it is going to be that the US economy eventually rolls over along with the rest of the world in this recent global downturn. Maybe the oil price weakness will translate in more lost jobs than the bulls realize. Or maybe it will be that the rest of the world ends up bouncing more sharply than the pundits anticipate – rates have gone down a long way throughout the rest of the world – maybe the global economy will prove more resilient than the pessimists reckon. Or maybe the Fed will end up being much more reluctant to raise rates than the market is counting on (although not me – I fully expect them to only raise rates kicking and screaming).
Whatever the reason, I expect the next surprise will be US dollar weakness – not strength. When I see articles with the words “only game in town” in the title, it does not assuage me to jump on the bandwagon. In fact, it perks my antennae up for opportunities to fade the consensus.
I don’t know when I am gong to actually short some US dollars, but I am on the lookout for a good spot. Somewhere in here we are going to get a vicious correction that is going to catch a lot of these fast money guys flat footed. It will come out of nowhere and the trigger will only be obvious in hindsight. But make no mistake, the one sided nature of the speculative positioning is setting up for a violent move the other way. US dollar bulls beware.