I have never run a marathon, but supposedly there reaches a point where you are so tired that some people have, well how should I put this? Issues…
During the past nine months the US Dollar has run its own marathon. In that time, the US Dollar index has rallied over 25% – making it one of the biggest rallies of all time over a similar period. But it has gone a long way without a break.
Now finally the rally looks like it is running out of steam. The US Dollar index has stopped going up, and is in fact bumping along support for the third time.
We all know that triple bottoms are about as common as sober sightings of Lindsay Lohan, so I am extremely reluctant to count on that 96.50 level holding for the third time. Especially when you consider that currencies like the Canadian Dollar have already broken out.
And other currencies like the Australian Dollar are on the verge of doing the same.
This is at a time when the hedgies and other professional traders are still clinging to their massive net long US dollar positions.
The long US dollar trade was the big money maker last year, and until it actually starts correcting, the specs will be loath to cover. I have been (mistakenly so far) anticipating a correction as sentiment had become so lopsided that it was difficult to see who was left to actually buy US dollars.
But if there was ever a sign that the trend is nearing the end, this report that Microsoft has recently hedged their US dollar exposure is pretty well as good as they get:
To combat the strong dollar, Microsoft engaged in about $15 billion in currency hedging in the latest quarter, longtime Microsoft analyst Rick Sherlund said Friday.
“That’s the gross value to protect against currency moves,” said Nomura Securities’ managing director, who made his calculations based on Microsoft filings.
Let’s add up all the signs. We have one of the biggest uninterrupted US dollar rallies finally taking a pause, bumping up against support for the third time, with the specs still net long a boat load of US dollars and large multi-nationals like Microsoft finally figuring out that the rally hurt and maybe they should think about hedging that exposure. This US dollar rally is tired, and can’t be trusted. It’s mile 25 and the US dollar is desperately scanning the running route for a portable toilet. Don’t trust the dip, it’s that sort of innocent correction that quickly gets out of control.
Did something change yesterday?
Yesterday they clubbed bio-techs like a baby seal (I know, terrible analogy… especially coming from a Canadian whose country should be ashamed of the continued brutal method of seal hunting still being practiced).
There was no real catalyst for the sell off. It was just time.
But what is most interesting are the stocks that went up. Have a look at Newmont:
Or how about Vale? It’s even more “panicky buying” looking:
There was a huge rotation yesterday out of the winning stocks and into the laggards. If I had to guess, it’s my belief that investors are setting themselves up for a China rebound. The real question is whether this was a one or two day affair, or the start of a new longer lasting theme.
Don’t forget how bearish all the “pros” are on commodities. Have a look at the Barron’s Big Money poll from last week-end:
Let’s see, 82% bullish on US stocks, while 75% bearish on commodities. What if all these “pros” are wrong about the direction of the global economy in the coming quarters? Nah… can’t happen – these guys are “pros” after all. The fact that the consensus is so overwhelming in one direction means they are even more “guaranteed” to be correct. Yeah, sure…
Thanks for reading,
the Macro Tourist