Summarizing The "Long Dollar Trade" In One Chart

Tyler Durden's picture

With the USD experiencing its longest stretch of weekly gains since Bretton Woods, it appears, as SocGen notes, that recent currency movements have triggered nostalgia of the pre-crisis world when dollar strength was synonymous with a prosperous global economy. However, given the extreme positioning and potential for policy-maker complacency, SocGen warns the paradox is thus that a strong dollar tantrum could be a more worrying scenario than a Fed tightening tantrum.


The Long USD Trade...


If you are a trend follower, the trend is your friend.

If you are a contrarian, you might want to go short the USD ...


But as SocGen's Michala Marcussen warns, beware the strong dollar paradox....

Recent currency movements have triggered nostalgia of the pre-crisis world when dollar strength was synonymous with a prosperous global economy. Hope today is that a strong dollar will cap US inflation, delay Fed tightening and boost exports to the US. To make an impact on US inflation significant enough to slow the Fed, we estimate, however, that EUR/USD would drop to 1.10, USD/JPY to 120 and USD/CNY to 6.50 to significantly shift Fed expectations. To our minds, moreover, such a scenario would only materialise if the growth gap between the US and the other major economies were to widen further.

Should recent dollar appreciation, moreover, breed complacency amongst policymakers elsewhere, this risk scenario could become a very painful reality. The paradox is thus that a strong dollar tantrum could be a more worrying scenario than a Fed tightening tantrum.

1. Dollar not yet strong enough to delay the Fed

Dollar close to long run average: Recent dollar movements have been sharper-than-expected and several crosses (including EUR/USD, USD/JPY and USD/GBP) are now at levels that we had initially only expected to see early next year. For all the speed of movement, however, the dollar does not yet qualify as “strong”. Trade-weighted, the dollar is still just below the long run average. Moreover, on the type of horizons that matter for economics, dollar appreciation remains modest; the trade weighted dollar is up just 2% year-to-date over the 2013 average. Looking ahead, we expect further dollar gains and by mid-2015, we look for a gain of just over 6% on a full year basis.

US growing well above trend potential: The US economy is on course 3%+ growth rates over the coming quarters, well above the 2.2% at which we estimate trend potential. This week’s numerous data releases, including the key September employment report (we look for +260K on non-farm payrolls) should confirm firm US growth. With each batch of robust data taking the Fed a step closer to the exit, the debate now is just how much dollar appreciation it would take to delay the Fed.

The CNY has appreciated (!) against the US dollar: As a rule of thumb, using the OECD growth model, a 10% appreciation of the trade-weighted dollar cuts 0.5pp from GDP growth and 0.3pp from CPI inflation in the first year after the shock. Two points merit note, however. Firstly, by country, we find that China has tended to exert the most significant influence on US import prices. Since this latest dollar rally began in the early summer, the CNY has been one of the rare currencies to appreciate (!) against the dollar, albeit by a modest 1%. Secondly, we note that the narrowing energy deficit, as the result of the shale revolution, suggests reduced elasticities over time.

Taking account of these points, we find that to significantly delay Fed rate hikes, we would need to see an additional 10% appreciation of the trade weighted dollar relative to our baseline. That would entail EUR/USD at 1.10, USD/JPY at 120 and USD/CNY at 6.50 (and would require other major currencies such as the CAD and MXP to also depreciate significantly). Such a scenario, however, is most likely if growth disappoints materially in the other major economies relative to our baseline scenario. A significantly weaker outlook for the main trading partners of the US would it itself be a cause for the Fed to delay.

2. A worrying trend on growth gaps ... and capital flows

Several EM economies set to growth at a slower pace than the US: While the consensus growth outlook for the US has improved further in recent months, the opposite has been true for several other major economies, including the euro area, Japan and China. Moreover, our own forecasts remain generally below consensus with the exception of the US, where we are above. This view underpins our expectation of further dollar appreciation. Today, moreover, several EM economies are growing at a slower pace than the US. This is a notable difference from the pre-crisis era and has several implications. First, this lower global growth configuration is one reason why we believe that elasticities linking currency depreciation to growth may now be lower. The correlation between commodity prices and the dollar has also shifted. Finally, we note that capital flows are now moving in a very different pattern.

Dollar and commodities: The link between the dollar and commodity prices has seen several shifts over time. Already prior to the latest moves in currency markets, commodity prices were trending lower in parallel with Chinese growth forecasts. More recently, it seems that dollar depreciation may have been an additional factor driving prices lower. For commodity importers, this is helpful; for exporters, this marks yet a headwind.

Fed tightening may be a better scenario than a very strong dollar: Pre-crisis, in a simplified summary, the strong dollar can be described as having been driven by a global savings glut (mainly from the official sector in emerging economies) seeking a home in US Treasuries and, at the same time, US investors seeking risky capital abroad to profit from strong EM growth. It is also worth recalling that QE1 drove the dollar stronger and supported risky US assets as Treasuries rallied. QE2, on the other hand, saw dollar depreciation as US investors sought return in higher yielding asset abroad, and notably in emerging economies. As discussed above, we believe that a significant appreciation of the dollar relative to our baseline would be consistent with much weaker growth elsewhere.

In such a scenario, dollar would equate to further capital outflows, placing further pressure on already vulnerable economies. Indeed, a “dollar tantrum” scenario could well prove more painful than a “Fed tightening tantrum”, assuming the later comes with better growth in the rest of the world.

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nightshiftsucks's picture

So the world economies are going into recession and we're still going to grow ? This guy is a fucking idiot.

deflator's picture

 You didn't see that coming? What exactly do you think dollar hegemony means? This is why China and Russia want to move away from a dollar based global economy. 


 A lot of other countries will eventually follow SCO lead because the FED will continue to run dollar hegemony in the ground covertly and overtly.

ZerOhead's picture

The people on the train look Mexican....

mickeyman's picture

They're Indians . . . crossing the border into Maine

BigJim's picture

Bit OT (though supposedly USD strength related...) is anyone else intrigued by the gold:silver ratio? Now approaching 70:1... is it time to sell some gold and buy some silver, do you think?

In an ideal world I'd be stacking both, obviously, but income is a bit low at the mo. So flipping between gold and silver when the ratios are extreme and then waiting for a bit of mean reversion to maximise my ounces of gold overall.

Also obvious, is that bid/ask on physical is too wide to make this economic, but via Bullionvault the tight spreads make it  feasible if you get the timing right.

Hulk's picture

I thought Indians rode Horses...

deflator's picture

So the world economies are going into recession and we're still going to grow ?

This guy is a fucking idiot.


This Tyler is not a guy... Michala Marcussen 

Wild Theories's picture

and she is not a tyler, these are openly stated advertorials from xxx

kaiserhoff's picture

I've never seen that train on the Illinois Central.

Winston Churchill's picture

I spent one Christmas day in the luggage rack of an Indian train.

I could only get 3rd class tickets, still better than amongst the livestock, human and animal,

down below.

AdvancingTime's picture

Every now and then a very notable and important event occurs, sometimes it slips by without even being noticed. For months the major world currencies have traded in a narrow range as if held in limbo by some great force. This has allowed people to think we were on sound footing as central banks across the world continued to print and pump out money chasing the "ever elusive growth" that always appears to be just around the corner. Recently some currencies have made multi-year highs.

Weak demand for goods and most of this money flowing into intangible investments inflation has not been a major problem, but the seeds for its future growth have been planted everywhere. John Maynard Keynes said By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

While there are not many Bond Vigilantes there are a slew of  Currency Vigilantes and they are ready to make their presence known. Weakness in the value of the Yen, Pound, and Euro must not go unnoticed. More on why this may be a signal that currency trading is about to get very wild in the article below. Please note, this may also be sending a signal that the whole system is unstable and the stock market is about to drop like a stone.

Stained Class's picture

More probably, the end of a trend......

SAT 800's picture

Yes; when it's main stream news it's time to short the rally.

ken's picture

What about gold stocks?

Drummond's picture

Has that train just pulled up in Calais? This is getting out of hand now.

SAT 800's picture

Losing the race to the bottom doesn't mean much to a country that doesn't export anything anyway. I believe some kind of currency warfare is being conducted behind the curtains.

Seasmoke's picture

Inflation in needs. Deflation in wants. 

lordbyroniv's picture

What does this do for my SilverAge comic books and copy of Spiderman #1?

Kirk2NCC1701's picture

All you need is a bad spot on the track, for things to get very, very messy, very fast.  Irreversibly so.

Rider beware.

Bangalore Equity Trader's picture


This guy is clearly a racist NAZI anti-Bangalorian!

whatsinaname's picture

You again Bangalore ? Why dont you Banga get lost ?

Bangalore Equity Trader's picture

Listen Name.

I'm going to make myself clear here.

America is lost. Like a ship at sea with no rudder.

Who is "YOUR" tugboat? What is the fee for the tow? And where are they going to take you.

Yes_Questions's picture



looks like barnacles at first glance.


and a really tedious way to get from a to b upon closer inspection.






DipshitMiddleClassWhiteKid's picture

they forgot to mention other currencys are weak as shit


made a fucking killing shorting the kiwi, even on the crosses too



Quinvarius's picture

Meh.  They are just setting the stage for another printfest.  We have wars to start.  

q99x2's picture

The US has uncontrolled growth,. ie.cancer.

Cut the cancer out. Arrest Loyd Blankfein.

hotrod's picture

Looks like ISIS WMD.  Dump that load in someones country,

gwar5's picture

Dollar up 4% against the Philippine peso, sweet. Buying bug out/retirement house in PH in 6 weeks. 


Treason Season's picture

A little too close to Fuk U She Ma


A flight to the fed dollar is expected before a new monetary system is (forced) implemented in world markets.  This is still the sheep flocking to what they preceive to be a most trust worthy asset to hold.  Few and far between know history and stack Gold.

jomama's picture

far and few as in the Chinese, Russians, Indians, and every other nation that get ahold of physical?

Pantalone's picture

The dollar is the healthiest Ebola patient in the secessionist protest march. 

yogibear's picture

The fed's solution is to crush the dollar and force everyone to do SDRs. Other currencies collapse first. The Yen is getting close. 

bid the soldiers shoot's picture

The Fable of Reynard and Tyler

"But Tyler," said Reynard, "These American lemons are quite sweet.  Here try one."

"Num num," said Tyler after tasting one, but he looked away from Reynard, and frowned as his lips puckered. Then his nose wrinkled.

"Those lemons aren't sweet," Tyler said to himself.

For time out of mind, America wanted China to let the yuan appreciate so America's exports would be more competitive, their balance of payments would improve, and the American export industry would grow and prosper.

For a few years China complied and let the yuan creep up.  But stupidity, like water, will seek its own level, and America decided it wanted its cake and wanted to eat it.  

In the Presidential Palace in Kiev.

Today the story of Nuland and the cookies is more well know than the story of Jesus and the loaves. How Nuland took a small package of Pepperidge Farm Cookies and $5 billion and fed the Nazis of Kiev.

She made the coup, Viktor V. fled and the next day the Chinese dropped the bottom out of the yuan.

But that's a different fable.



Wild Theories's picture

nice fable, but didn't think China dropping the yuan was tied to Ukraine.

China was dealing with serious liquidity squeezes in the early part of the year, most of the capitial in China was either hoovered up into various speculation channels or tied down in supporting non-performing enterprises and loans, all supported by the carry trade created by cheap global credit and the then almost-certain rising expectation of the Yuan. They took an axe to sever the links to easy credit and all the derived carry trades based on the rising yuan to free up their own liquidity.

bid the soldiers shoot's picture
February 22, 2014
Ukraine parliament ousts Yanukovich

KIEVSat Feb 22, 2014 6:48pm EST Reuters

We all can both accept this date, no?



FRIDAY, FEBRUARY 28, 2014 - 03:44

China Yuan Has Record Monthly Fall As Govt Tackles Speculators


BEIJING (MNI) - The Chinese yuan saw its biggest monthly fall in February since currency reforms first began, as a move by the authorities to squeeze speculators triggered an extraordinary eight days of trading.

The 1.38% drop in the value of the yuan dwarfs the previous biggest monthly fall of 0.923% in May 2012. February's record drop may appear positively stable by emerging markets standards, but it's an unprecedented move for a currency which, until recently, had been widely expected to continue appreciating on a steady, if gradual, path.

The currency ended at 6.1450 on Friday, down 1.73% from its 6.0406 intraday record high hit on January 14.

Analysts believe that China's economic fundamentals mean the yuan will resume its appreciation path this year, with the official People's Daily citing an economist this week forecasting an eventual break through of 6.0000 to the U.S. dollar.

But the currency's immediate path is uncertain because the authorities are now attempting to manipulate its value, and the level of domestic interest rates, in order to reduce to attractiveness of holding yuan assets and curb speculative inflows.

Key resistance levels tumbled quickly this week as trades that had until recently been considered no-brainers were unwound. The 6.1500 level had been considered key resistance going into the Friday session, but was quickly lost as the yuan plunged to near its 1% daily trading limit.

Despite the relative violence of the move, a senior Chinese government source told MNI that the sell-off was "tolerable," indicating that the authorities are comfortable with depreciation for now.

More selling is expected in the coming week, although analysts believe there are limits to Beijing's tolerance given the risk of spooking the markets too much and triggering big outflows.

"At this level, they're just stress testing. 6.2000 or even weaker is not a big deal but I don't think they will allow it to weaken more than that," said Mizuho Securities economist Shen Jianguang.

Key actors within the Chinese government are happy to see a weaker currency, not least the Ministry of Commerce, which represents the interests of exporters and has long opposed the PBOC's attempts to push for more aggressive currency reform.

The yuan began its slide following a sharply lower central parity fixing on February 19. Another government source told MNI that the authorities moved to narrow the spread between onshore and offshore rates to curb arbitrage activities.

The State Administration of Foreign Exchange said this week that forex purchases by banks on behalf of clients doubled in January over December, suggesting that last year's flood of overseas capital into the country didn't let up at the start of 2014 (China's foreign exchange reserves rose half a trillion dollars last year).

A falling yuan has contributed to a growing sense, both inside and outside the country, that China is becoming an ever-riskier bet, though the ructions appear contained for now.

"While there are some losses on this trade, the big funds with trades on have other winners, like long US equities, which have been more than paying back the losses on this one," said Gregg Gibbs, a strategist with RBS in Singapore.

A broader question is what Beijing intends to do by scaring investors out of the idea that the yuan can only move one way.

The government source told MNI that another widening of the yuan's daily trading band could come in the second quarter of this year, and that would help explain why the PBOC wants to curb appreciation bets.

A band widening on its own means little for Chinese reform -- the widening to 1% from 0.3% over the years hasn't done much to instill the idea of two-way volatility -- but could point to a more concerted effort to overhaul the financial system in 2014 in the wake of a key Communist Party meeting last November.

The yuan has risen 34.68% since it was first depegged from the dollar on July 21, 2005 and is up 1.61% y/y.

One man's wild theory is another man's real poltik.  The US had been brow beating the Chinese about the undervaluation of the yuan for years. In an futile attempt to mollify the situation, the Chinese slowly raised the value of the yuan. But kept their ability to lower it as a threat against the the US, who, hamhandedly promoted  a coup in Kiev.  The Chinese retaliated  in support of their BFF, the Russians.

You can believe the cover story if you want.  But it was the nazi/nuland coup forced the issue.

The US financial policy makers, finally aware that the Chinese hold the export whip hand, are now making the case that a strong dollar trumps a weak one, and that those grapes were sour while these lemons are sweet. 



KnuckleDragger-X's picture

Currency wars, what fun ......

orangegeek's picture

USD index has seen the decline of all six of the inverted bias currencies and thus the rise in the USD.


89 appears to be a slowing area for USD upside.

CHX's picture

Fiat shuffle article. Strong dollar, taper, blablabla, weak euro, interest rates blablabla, capitle flows, cleanest dirty shirt blablabla. 

SHORT ALL FIAT. As JP Morgan (the man) remarked it's all just credit