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Do US CDS Anticipate An Increase In The Value Of The Dollar?
In the ongoing US bizarro economy, up is down, and economic weakness represents itself by an increase in the stock market, due to expectations of future liquidity injections and fiscal stimuli, further weakening the dollar. Yet as sovereign CDS has recently taken on more relevance once again, we present the relationship between U.S. 5 year CDS and the DXY index, which over the past 18 months have correlated surprisingly close. Observing the recent action in US CDS implies that it may be about time for the downward dollar trajectory to invert. However the question remains whether US CDS is more a reflection of the level of underlying US distress, or is indicative of the euro-denomination of US CDS. With investors seemingly willing to blast Central Bank policies on a daily basis via the gold market, which in turn drives the currency market, the chicken or the egg circularity of whether fundamentals or correlations drive corresponding risk metrics once again rears its ugly head.
In either case, a simple observation of US risk indicates that the dollar may be due for a pullback. Whether this occurs, will likely be confirmed by the lack of any new dollar-crushing statements out of the Fed.
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Ratner currently on Bloomberg TV in a special presentation on the economic crisis - other debaters include Spitzer, Zandi, Galbraith etc... ( "Are Obama's economic policies working?" is the topic)
LOL
http://www.bloomberg.com/streams/video/LiveBTV200.asx
Hey, what happened to the fly on the wall?
Thx for the good stuff. By the way, what was the R2?
R^2 is around 70% since April 2008 on daily value regression of DXY and USA protection - also interestiung to look at the rolling 20 (or even 40) day correlation - some notable 'twangs' when the two become negatively correlated...
I'm going to burn the shorts.
Actually a tightening CDS premium is not contradictory with a weaker US dollar. When a country cannot service its debt, it may default directly or default gracefully by printing money, if the debt is denominated in its own currency. In the second scenario the CDS buyer won't be paid.
Seems the point is that with the reserve currency nature of the $, the relationship may be predictive of carry unwind.
The relationship may be robust against the other currency/govt CDS carry pairs like the yen.
If the relationship is $ specific, default risk may be the explanation due to heavier TIPS issuance.
So since US will not default until they run out of nukes and/or green ink, their CDS should fetch negative premium compared to countries which do not have those options, right?
I don't know, I've been picking up long dated puts slowly over the last couple months, mostly as a hedge to all my non-dollar exposure (I figure the only way the dollar strengthens is at the expense of the market, specifically the financial sector). While the market is beyond ridiculously over valued with 100+ p/e ratios, it doesn't seem that matters in the "new" market.
Stocks will go up forever, period. When the huge deflationary collapse of trillions finally arrives bennyboy will just inject a couple quadrillion in excess liquidity and the rally will continue! Dow 100,000 here we come! USA USA!
when you start to long DXY, and make a profit, the broker will cancel your trade. How the fuck can anyone make a profit long dollar? the best way I guess is to wait for the assholes not to bother people's trade. that means probably never.
You could always errm... Short equities? Just a thought.
a) there is a global conspiracy hell bent on sending you margin calls
b) you are going long a currency its own issuer wants to see dead ASAP
pick the realistic option
My USD indicator has been giving BULLISH warnings for some time and I'm still expecting a USD rally when the DOW resumes it's downtrend and the bear market rally ends.
http://www.zerohedge.com/forum/market-outlook-0
Still posting this on every thread eh?
Same acronym as "GS" - are you trying to ruin us?
*sigh*
Thank you for those observations, I would not have seen them. Just out of curiousity, what was the correlation in percentage change or binary positive/negative? That would be a slight bit more helpful than a graph, especially with the inclusion of period specific correlations.
So if DXY breaks below 70, would EUR/USD CDS on 5Ys (or 10Ys) then diverge and sky rocket past 100 bps?
But if it remains above the 70 range, will they just correlate?
isn't it priced in euros?
perhaps the foreign investor carry trade flows which are more likely parked in treasuries rather than gold or stocks are hedging for a Fed exit which presumably will blow out the carry and force mass selling of the unprecedented amount of 5YRs at historical low 2% coupons. a 2.125% coupon (today's auction?) would be worth 89.5 at 4.5% yield.. that kind of rise in interest rates would be dollar bullish and destroy commodities.. imo
The Value of the dollar has eroded greatly since the 1970's. It has been on a continual downward slope, regardless of the fact that you may purchase electronics at lower prices the big ticket items (housing, health care, education, etc) are far more expensive today than in the 1970's
http://www.prime-targeting.com/value-of-the-dollar-every-child-needs-to-know-it/