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Will the Dollar Bull Market Catch You by Surprise?
By: Brad at www.CapitalistExploits.at
A bull market in the US Dollar is underway and its magnitude and duration are likely to catch everyone by surprise. I believe it isn't out of the question for the USD Index to advance by at least 50% within the next 5 years. If this forecast proves correct, there will be profound ramifications for the global economy and many financial markets, particularly emerging markets.
The Dollar Index has advanced by about 10% in the last 6 months, which is quite a sizeable move. However, if one takes a long-term view this isn't a large move. What I am interested in is the USD trading sideways for the last 7 years. Usually when a market has been locked in a trading range for a long period of time a breakout to the upside signals the start of a long-term bull trend.
Note the long-term chart of the Dollar Index below - the bull markets in the early 1980s and late 1990s occurred after long periods of sideways movements. After some 7 years of "oscillating" around the 80 level it is about due for an extended period of upward movement. This isn't hard to work out. It is the "collateral damage" of an extended bull market in the dollar that will be difficult to estimate!
A rising dollar is indicating the relative strength of the US economy relative to other economies and it will no doubt be a leading indicator of rising interest rates. Given that very few are expecting or positioned for higher rates in the future, this will have very important ramifications for many financial markets.
This has already started to play out in a number of markets, particularly commodity markets. Although a number of commodity prices have fallen quite significantly from their highs of 2011, if the behavior of the CRB Index below is anything to go by, we may well see the average commodity price fall by another 50% within the next 5 years!
Even if I am wrong and commodity prices only fall another 25% it would still take the CRB Index back to its GFC lows of about 350 and this will have a profound effect on emerging markets.
This is where we need to tread carefully - the two previous US dollar bull markets have seen dramatic collapses in emerging market economies and financial markets.
The early 1980s saw the Latin American shock. The 1995-2001 bull market brought down Asia and Russia with the Asian Tiger Crisis (1997) and the LTCM crisis (1998) respectively, one could also include the Argentine default in late 2001 as well! In short - extended periods of USD strength are associated with emerging markets financial crisis!
It has been a while since we have witnessed an emerging market centric crisis. One of the most dramatic was the "Asian tiger" crisis of 1997. During this time many emerging market currencies fell by some 50% against the USD.
Note behavior of the JPMorgan Asian Dollar Index (Asian currencies against the USD) below. This index was trending down well before the crisis hit in October 1997, the crisis didn't occur without a long period of warning! Also note the trading range with which it has been locked in for the last 4 years - the next move will be big and by all accounts it does appear to be to the downside!
From great lows in volatility come great highs - or something like that. In July this year something occurred in currency markets that we haven't experienced in at least a generation - "record" lows in implied volatility. Below is the JPMorgan Global Implied Volatility Index (think of it as the VIX of currency markets). It got to a record low in July.
This index only goes back to 1992. So it is a "record" as from 1992. However, if the index did go back another 20 years I find it doubtful it would have registered any lower readings.
What is the big deal here, you might ask. Never before have currency traders have currency traders been so unanimous in their belief that the USD would trade in such a narrow trading range - i.e. not move at all over the coming months. There could be a number of reasons for this but as far as I am concerned they are somewhat inconsequential!
I am a great believer in "contrarianism". Contrarians live by the saying "when everyone thinks alike the opposite is most likely to happen".
Why does this happen? Well, when everyone thinks alike there isn't anyone left to think alike so by default the opposite must occur. That is easy. The hardest part is in being able to identify the extent to which everyone thinks alike. However, it is somewhat of a dead giveaway that everyone is thinking alike when a record low in implied volatility occurs!
So from a behavioral perspective currency markets are entering a period of increasing volatility, extreme lows in volatility usually lead to extreme highs so get ready for the ride!
The current level of implied volatility isn't high by historical standards. This means that if someone wants to express a bullish view on the USD the most efficient way to do it is via long-term options.
Fundamentally - what supports a bull market in the USD and an eventual crisis in emerging markets? I previously touched upon this in my writings on the Singapore dollar and the Chinese renminbi, but in essence it is the "unwind" of the carry trade.
We would be delusional to imagine that the capital flows that have poured into emerging market real estate, local currency bond and equity markets will be immune to an appreciating US dollar and some rise in US interest rates.
I will quote Ambrose Evans-Pritchard's latest article in the Daily Telegraph to shed light on the carry trade:
The dollar revival could prove painful for companies in Asia that have borrowed heavily in the US currency during the Fed’s QE phase, betting it would continue to fall.
Data from the Bank for International Settlements show that the dollar "carry-trade" from Hong Kong into China may have reached $1.2 trillion. Corporate debt in dollars across Asia has jumped from $300 billion to $2.5 trillion since 2005.
More than two-thirds of the total $11 trillion of cross-border bank loans worldwide are denominated in dollars. A chunk is unhedged in currency terms and is therefore vulnerable to a dollar "short squeeze".
The International Monetary Fund said $650 billion of capital has flowed into emerging markets as a result of QE that would not otherwise have gone there. This is often fickle "low-quality" money that came late to the party.
Many of these countries have picked the low-hanging fruit of catch-up growth and are suffering from credit exhaustion. They have deep structural problems and a falling rate of return on investment. The worry is that a tsunami of money could rotate back out again as investors seek higher yields in the US, possibly through crowded exits.
Let us not forget that the US Dollar was in a bear market for some 10 years (from 2001 to 2011). Yes, one could argue over a year or two but at the end of the day the USD has been out of favour for a very long period of time. Given all the "death of the USD" commentary that was being bantered about up until a couple of months ago, it is hardly surprising that a huge complacency grew towards a multi-year bull market in the USD.
Therefore, the magnitude of the carry trade "unwind" is likely to be way underappreciated. Holders of long term call options on the USD against emerging market currencies are likely to be pleasantly surprised over the coming months.
- Brad
"The chart of the US dollar is by far and away the most important chart on earth." - Raoul Pal
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Are you out of your mind? The dollar index will drop over 50% in the next 5 years. Have you failed to notice our almost 18 trillion in national debt excluding unfunded liabilities? The next 100 years belong to BRICS. The US/Japan/EU minus Germany are done.
ZH saying the dollar is getting stronger, Alan Greenspan saying to buy gold.
What the hell is going on here?
The dollar is in a long-term bull market, but for the next few months it will pull back and re-group after a pretty impressive run up since last May...
http://www.globaldeflationnews.com/u-s-dollar-indexelliott-wave-update-f...
The autor of this article, forgets that the CB are slowly divesting from USD ... the last decade CB dollar reserves dropped from ~67% to ~60%
Why are Japanese car prices not falling ?
Toyota, Honda, Subaru are all made in the United states.
Toyota(IN/KY mainly plus various other states) and Subaru(everything but engine block and transmission housing for most models is made in IN) have been leading the charts for most American made cars for several years (depending on the metric - they generally show 'wages paid' as the metric).
Just an FYI...
I don't know why someone would junk you ....but thanks
Np. I just like to point that out to people who think the 'american' brands are built in the US. Ford/GM can cherry pick a couple of models that are heavily made in U.S.A. but the majority of their lines are much less made in U.S.A. than the 'import' brand.
Why? Labor arbitrage :-D Both groups are off-shoring work to lower cost locals.
When you trade in a market that's manipulated, you're really just seeing if you can guess what the manipulators are going to do...
I think the manipulators in the debacle that followed the global wipeout of 6 years ago, have done all but announce to the general public, via a hyperViral web post, a daily stint on the evening headline news, and late night talkshows, their moves to take the market from, say, 666, to 2500 or more over a period of 7 years. And then all bets are off.
We are approaching that 7 year mark, and according to Christine (aka Johnny Winter) LaGarde, 7 is a secret, magical number, enshrouded in mystery as evidenced by it being selected in casinos at the craps table as a loser.
And I'm pretty sure Howdy Doody was a puppet.
The real surprise will not be the continued rise of the dollar.
The real surprise comes when it is chosen for that rise to reverse.
It's best to treat all markets as you would casual sex with a bunch of strange but very attractive women, a different one several nights a week.
You surely want them in your double wide for a night or two, but you do not want to ever bring them home for Thanksgiving dinner with the family.
The dollar is at the top of its agreed upon trading band. There is nothing fundamentally bullish going on. If there were fundamentals at work, they would be acted against. The rise in the dollar more likely indicates a deterioration in dollar fundamentals. Central bankers impose exchange rates by buying and selling in cooperation. You are not going to see a tail event in any Western FOREX system currency. That is why Abe can print as much as he wants. The other CBs will always buy it all up like dogs eating their own vomit. The end result is pure economic destruction in the real economy.
In a country secretly run by paul krugman (because our "leaders" are nothing but emasculated poll-reading fund-raisers) the probability that the fed will remain placidly aloof from the biggest currency war in history is somewhere near zero. Stay tuned for s triumphant fed announcement that will be greated with worshipful awe by the financial community as our central bank shows that it can out-kuroda japan, as we taught him everything he knows.
Sure Brad sure
And when Obola pats you on your back you will crap dollars.
Hey Brad was probably paid good money by an alphabet agency to spew out this crap....at least he was smart enough not to use his surname so we can only speculate as to who Brad is.
Really? A 5 year forecast for currencies? Anyway, almost half of CRB index constituents are energy. 50% lower? really? well who knows... but historical cycles in commodities have NEVER seen something like that. Certainties are never complete about the future, but this article sounds to me too close to sci-fi.
i hope this article is correct to some degree... PMs are cheap cheap cheap and the more time i have to stock up the better :)
Go ahead, be long a dying, soon to be no longer a reserve currency.
WTF? Oh, wait--I mean, WTF!
This article is asinine. Yes there may be a synthetic short on the dollar, but the whole system will blow up if dollars are not printed and the whole system will blow up if they are.
We are near an existential crisis point for the fiat dollar reserve system. How can the author of this article simply look at charts and make prognostications?
What a dick.
Another problem with dollar deflation...ie 'a dollar bull market'...it defies reality. The currency is over printed and all of this is an illusion of the fiat system. Gold drops relative to the dollar but is being found scarcer every day. Oil drops but production costs rise. The richest nation in natural resources has its currency,the ruble, falling. The bad dream will be over soon as the productive nations lightly shake the sleeper. Upon waking he will find he is in a new world of money.
Meanwhile the last few tons of increasingly less valuable gold leak slowly from GLD
"Risk adjusted rate of return". Wall Street only knows "rate of return." Clearly a bubble has burst in the Bakken and in Permian. Wall Street will just "rock on" of course...but I fail to see with this lack of recovery going on forever now who else can? I say the best speculative play right now is zero coupon treasury bonds.
That's a thirty year treasury note that yields zero and is long only the principle. A ten year might move even more.
Blue skies forever! No wonder so many people are long the dollar. What could possibly go wrong?
The USD is the shittiest major currency except for all other major currencies? I mean, you got the Euro and Yen, which could both collapse at any moment.
Oddbal situation in my view. Fukushima, friggin Trichet at the ECB and "two speed Europe." Now "enter the Poopie Pants" (term I use for Putin...who is still agreat Russian btw. Right out of Dostevsky and Checkov really. Lovable in a psychotic sort of way.)
Anywho...we're full on "hyper-drive" and "no I did not see you playing with your toys, sir."
If you are long the Dollar my friend, it is probably a good "long term" bet. Dollars are still what would be classified as "a deal". To refute how far and fast it will travel one need only look at the stock market to realize that sometimes things don't always go the way we expect. Central banks generally control the rate that currencies rise or fall. Although it would be desirable for most other countries in the western world and east to experience a rise in the Dollar where they could go back to exporting their goods mindlessly to the US consumer it flies in the face of all the inflationary policies that the Fed has introduced and spent trillions on over the past seven years. A strong Dollar averts all this. It causes trade deficits of incredible magnitude and once again fosters a complete dependence on the US consumer to carry the world.
Ain't gonna happen again for a while my friend. Measured in decades. Now that these jokers trade freely on the open markets through exchanges (which is now known although likely has been taking place for a very long time) would you like to take a position against the Fed? Be my guest. It's worked well for the perma bears in the S&P too. Although I agree with your contrarian approach in most circumstances this is not one of them. The crowd is wrong most of the time but not always. I am willing to make a wager (and already have) that the EURO rises slowly from here and stays sideways for a while. Just as the Dollar does the same. Sideways to down. Measured in months until it hits the 83-84 level again and then it will reverse. The countries that have enjoyed the weaker currencies for a period of time will once again find them strengthening if only marginally for an extended period of time. I am long the GBP for example. Why? It is a value buy at this area. Do I give a shit that it moves 500 pips against me as a result of the assholes who rig the markets? Nope. Not one bit. Hopefully someone who can move the markets takes a nice fat position against them (like maybe the Fed) and blows out their shorts. Same thing with your long the Dollar theory. I'll go short the USD/CHF which is generally the same as the DOllar index and will hold it for a while. As for commodities, they might rise a bit as the Dollar moves sideways to down but not a big increase. Deflation is imported nicely when the Dollar gets too strong. Last I heard the Fed doesn't like that little spectre. Cheers!
Oil and natural gas is what's worth all the money not the friggin dollar. "Accident of history" that's all the soaring dollar is. "Like a black winged bird" tho.
Long Crows.
Highly intelligent btw.
within the next 5 years
The period in which you could make such statements with a straight face ended many years ago.
"Oh, Bother", said Pooh, as he chambered another round.
THIS is the BEST DAMNED quote I've seen ALL WEEK!!!!! LOL!
In both of these cases, the emerging markets were debtors. This time, the emerging markets are the creditors. That is a big difference. As different as night is to day.
What western currency bloc is still a net creditor ? The Eurozone.
For all the good it will do them... all their debtors are bankrupt.
?
Recently released minutes from the last Federal Reserve meeting confirmed growing concern about the pressure a stronger dollar is putting on other currencies around the world. Bottom-line is other currencies are under assault because both economies are weak and countries are buried in debt they can never repay at real market interest rates. When investors become unwilling to buy the bonds of heavily indebted nations causing the bond bubble to burst the values of currencies in those countries will tumble.
While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known. Recent weakness in the value of the Yen, Pound, and Euro must not go unnoticed. The Currency Vigilantes are acutely aware of when a currency is overvalued or ready to be re-pegged and pounce on the weak currency to tear it apart. The article below questions just how stable the currency markets really are and it may be a signal that currency trading is about to get very wild. 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.
Many people are looking for a "dis-inflationary crash" and it is possible or we may see money shift from bubble to bubble. I have pondered the possibility that what we are and have been going through is the "major deflationary period" before the storm. When we stand on the abyss central bankers will be forced to print so much worthless paper the money will act as a cushion to our fall but not change the reality. Before you discount this possibility that we will move directly into the final stage of hyperinflation consider that hyperinflation paves an easier transition to a replacement currency and a reset of the system.
http://brucewilds.blogspot.com/2014/10/fed-concerned-that-stong-dollar.h...
"BANKSTERISM."
Defined as "the fact that we owe you all the money in fact means you owe us all the money."
BANKSTERISM.
Bee, A. En, Kay, Esse, Tee, Eee, Are, Eye, Esse, Em
BANKSTERISM.
(Yes, I won a spelling Bee once...hard to imagine isn't it!)
Move along...
What a bunch of malarkey.
What bonds are you talking about ? What debt ? The emerging economies are the CREDITORS. They use dollars to fight their own currencies weakness. The weaker the periphery gets, the more they will deploy dollars. Which will flood the forex market with DOLLARS. Which will cause an uptick in velocity, which will cause inflation and DOLLAR devaluation.
http://freegoldobserver.blogspot.ca/2014_09_01_archive.html
AND...DOLLAR BULL MARKET=DEFLATION.....
that will not be allowed
deflation kills fiat
I promise it will be fixed or else it will bring us down
Stop confusing people with facts!
Stop confusing your money with their money.
Funny how people always get bullish at the top.
Good job Capitalist exploits.
The Euro will make new highs in 2 years.
He means it will be the last major currency to go down the toilet. The Yen is toast. The Euro will collapse if Draghi does QE and the Germans object. The Euro will collapse if they don't do QE because the PIIGS will collapse. The Ruble has already collapsed. Maybe the Pound Sterling can last a bit longer.
Dollar being in the craper has nothing to do with the reality of those who do not have any.
The rich hold all the dollars and the poor have shit. That will create the demand for what they don't have.
Even if the value of it is crap. There is the race to the bottom. Would you rather own yen.
Hitler attacks!
And its gone....
http://www.bloomberg.com/news/2014-11-13/forex-investors-may-face-1-bill...
One billion dollars just disappears. Reminds me of the MF Global fiasco. The people behind this should go to jail just like Jon Corzine.
Oh wait...
Sounds like one of those BTC trading sites. They should name their forex trading site after a card game. Maybe it will do better...