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Don't Lose the Forest for the Trees: Dollar Rally Still in Early Days
Many investors appear to have lost their bearings. It is as if the proverbial rug has been pulled from beneath their feet. Last week's bolt from the blue by the Swiss National Bank is simply the latest in a string of significant surprises.
The decline in US Treasury yields despite the fastest growth in more than a decade in the April-September 2014 period took many by surprise. The collapse in oil prices was unexpected, even though the increase is US output was widely known. It was also well known that OPEC itself was producing in excess of its quota agreement. In late October 2014, the Bank of Japan took the market by surprise. It decided by a 5-4 majority to dramatically increase its already aggressive easing.
Although tomorrow's likely decision by the ECB has been well telegraphed and anticipated by investors, there are so many moving parts. It is not unreasonable to expect a volatile reaction regardless of the particulars.
As difficult as it may be, medium and long-term investors may be best served by staying focused on the big picture. This key element of this big picture is the divergence between the US and the rest of the high income countries. Specifically, the policy responses to the shock of the financial crisis differed depending on numerous institutional, ideological and idiosyncratic considerations. The different policy responses have produced different economic outcomes. Those different economic outcomes are the critical fundamental fact that underpins our expectation for the dollar to continue to appreciate on a trend basis.
The economic and policy divergence will likely last not months or quarters, but at least a couple of years. This implies, as we have argued before, that the dollar bull market is still in its early days. We expect the euro to fall through parity ($1.00) next year. We suspect before it is over the euro will approach the historic lows set in the 2000-2002 below $0.9000.
The divergence with the UK may not be as extreme, and the BOE is bound to hike rates before the ECB, but that now seems to be more than a year away. Sterling is likely to fall below $1.40.
The dollar's performance against the yen seems somewhat less clear. The dollar has appreciated by around 20% since the late October BOJ surprise. Surveys indicate that many Japanese businesses do not seek a weaker yen. Nevertheless, the power of the dollar's bull market may be sufficient to carry the greenback toward JPY130-JPY135, where it peaked in 2002.
The Bank of Canada surprised the market earlier today with a rate cut. The US dollar is likely headed toward CAD1.30, the high from 2008-2009. Before the US dollar bull move is over, it can move into the CAD1.35-CAD1.40 area.
The Reserve Bank of Australia is likely to resume its own easing cycle next month. Despite the anticipation of these rate cuts, the slowing of China and the drop in commodity prices, the Australian dollar has not fallen below $0.8000. We expect the divergence of policy will push the Australian dollar toward $0.7400.
We have identified that the key policy signals from the Federal Reserve emanate from its leadership (Yellen, Fischer and Dudley). They continue to suggest a rate hike in the middle of this year is still the most likely scenario. If the market pushes its expectations out into later this year or even next year, it would impact the pace of the dollar's advance. However, in the big picture, we have little doubt that the Fed will indeed raise rates before the other central banks in the G10.
In addition, the US economy expanded above trend after the largely weather-induced weakness in Q1 14. The consensus is for the US economy to expand by a little more than 3% in 2015. Even if growth is a bit slower, the divergence between the US and other high income countries will remain significant.
There will be near-term volatility, and while currencies trend, the trends are not smooth. There is no substitute for disciplined risk management. That said, we see much life left in the dollar's bull trend. On a real broad trade-weighted basis, the dollar's bull market in the late 1970s into the mid-1980s, was more than 40% from trough to peak. The rally in the mid-1990s to early 2002 was about 25%. The rally since the 2011 record low has only been about 12% as of the end of last month-- Early days indeed.
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Excellent as always Marc....Many Thanks
Whats F%$#ing excellent about that rubbish?
"Laugh if you want to. Cry if you want to, but the bull market for the US dollar has legs and life"
I say BS because the US$ has legs & life - -- until it doesn't! -- - and that could happen quicker than many imagine which would be an excellent outcome for the rest of the World.
Besides - the Fed lies as amatter of policy -they could pull the plug on the $ and devalue at any time just like the Swiss. A strong $ does no good to the USA or other countries.
Calm Down Ligshot....your emotion must tangle your micro balls up into a knot.
Marc's analysis is excellent, and you must not be able to find your ass with Google, a map and a helper.
Think of the world as a bunch of skydivers who jumped out of a plane - all thinking their parachutes are going to work (but ALL are defective - NONE will open and EVERYBODY is going to hit the ground ).
Just because YOU jumped from a higher altitude and the others will hit the ground before you doesn't mean you'll be fine.
In fact YOU are going to make a BIGGER SPLAT having jumped from a greater height.
Infrastructure spending coming up and bigtime tax reform will ignite the fuse.Many don't believe me but because of poor economic conditions outside the United States I still believe that gold and silver will run up with the Dollar as people worldwide invest in both for security.The Dollars are coming home and when it happens you'll see the biggest economic boom that rivals China.Then,shell all go bust after hyperinflation dies.Gold will be the last man standing in the ring.
Let me see if I follow this. In a NORMAL world, if the dollar is rising thus providing more purchasing power, a dollar would buy more stawks causing the stawk market to fall?
I don't see that happening.
What about that elephant in the room? China yuan will come to the rescue. With support from Russia, India and Brazil. Europe will follow. Bye bye dollar.
quick story. small co. needs to hedge a few euros Q2 '15 for some equipment bought Q3'14. making more on the dollar than on the equipment just now.
tried to open a new Schwab OptionXpress. CLOSED DUE TO FXCM.
incredible. open to suggestions
can wire funds in one hour or less. its not how quick i am, its a small co. trying to hedge a rare, relatively small amount for a few months in a volatile FX market no one can predict and the hoops i hv to run thru after spending two hours filling out applications; then told NO NEW ACCOUNTS UNTIL FURTHER NOTICE
u just cant make this S#@t up
Just use 'Norbert's Gambit'.
Find a stock that trades in both the US and a EUR market.
Buy the stock with Euros in a EUR market and sell it for dollars in the US market.
No need to pay any FX fees to the moneychangers either!
tks B. was thinking about options on a basket of euro blue chips or something like that
like BP, BHP, Nestle, HSBC....NOT
Schwab is a pain in the ass to deal with in good times. Try Fidelity, or any of the smaller commodities shops.
Depending on what you need, you might match up with a loan in Euros. Any of the bigger banks could do that for you, if they want to.
been w/ jpmchase 30 years. told me it wud take 'two to three weeks due to the new regulations'
swear i'm not making this stuff up
Dollar will rise faster and faster now, due to feedback loop of destruction; then will drop like a rock by about 50%, virtually overnight. Expect sudden change by the end of February.
How quick on your feet are you?
From WSJ, 13 hours ago:
http://www.zerohedge.com/comment/reply/500721/5689471
FXCM Inc. shares plunged by nearly 90% Tuesday as investors reeled from terms of a rescue deal for the foreign-exchange broker after it had suffered heavy losses tied to the Swiss franc’s jump last week. [....]
Marc, you're an absolute poster child for normalcy bias. The old tools for analysis were rendered obsolete five years ago. Where you been, son? ALL the markets are now manipulated, and you're extrapolating your advice out to two years, based on trends?? Did you notice the "trend" for instantaneous global change exampled by the SNB?
The rise in the dollar is already wreaking havoc over the entire planet. What do you think just five more points on the dxy will render? Have you not even given a single thought to the new BRICS trading platform, into whose arms any further substantial rise in the dollar will drive a host of smaller countries to? --nor to the many yuan swap facilities being set up around the world in anticipation of precisely such circumstances?
Twelve months from now you'll be selling apples on the street corner out of the trunk of your Lexus --if you can afford the apples.
I'm sort of shocked that there isn't more hating on Marky Marc. This is all true but only if you really think that the US Banksters
1) will raise rates (they likely will, as previous experience has shown...hubris knows no bounds)
2) will keep rates at said raised level for any length of time and
3) will refrain from QE4.
All unlikely but TBD. Any more predictions, Karmac?
there are debts to be paid... by default the lender will pay, who is ultimate lender? the people of the future are the ones lending their productivity. so they must work for less a small fraction of what labor and finance will earn now. so our reckless squandering of resources including labor and finance will be the ruin of the future. the question is when does the future arrive. it is not long we will be there I bet.
there are debts to be paid... by default the lender will pay, who is ultimate lender? the people of the future are the ones lending their productivity. so they must work for less a small fraction of what labor and finance will earn now. so our reckless squandering of resources including labor and finance will be the ruin of the future. the question is when does the future arrive. it is not long we will be there I bet.
All of which is irrelevant, what is relevant you ask, Jeep named their new 4 cylinder TigerShark....gotta have it, gotta.
You need to seek help! The usdx is clearly consolidating on the daily chart.
No, no, this guy really can predict the future.
Goldmann? Is that you? I'm not ready for another Kermit-ing.
The Americans seem determined to price themselves out of the world market...
USD being bought to pay off derivative contracts
It's not the American people making these decisions, it is the leaders of the banking system and the currency war is still in its early stages, so the worst is yet to come.
It's a global system that still functions on dominant $USD trade settlement. In a world of increasing volatility and geopolitical uncertainty (and unknowns from nations we are not 'friendly' with - i.e., who have their own designs on global trade), the $DX does indeed look 'untouchable'. However, as we just witnessed, things can change. In addition, everyone knows what happens (after) a circuit enters thermal runaway...
Pretty amazing acceleration lately: USDSEK (for example):
took eight months to 20 Nov to go up 11%. Then the strengthening of the dollar accelerated - last two months -
UP 10.6% - almost a 4 x increase in the rate of rise.
wowowow.
Not so wowowow when you consider the level of MIC expenditures by country.
First it was "Gold, bitches!" Then "Bit-coin, bitches!" All the while what we really meant was "Peak oil, bitches!"
Most U$D-FRN are in the form of digital 1s & 0s -- not cash. After default tsunami wipes out most 1s & 0s, U$D-FRN (in CASH) may be the only place to hide as impossible as it may be for most ZHedgies to fathom.
When is it time for Bitchez, bitchez?
I think you're right, up to a point. Think about it, how many people have much cash in their possession? Not many. Still, in the long run, cash is just an iou for gold. Or it used to be. If I were investing during Roman times, before the fall, you bet your ass gold would be the ticket. Still, for all the money printing going on, not a lot of cash in sight. Just a lot of credit. Well, credit goes towards buying stuff, all on the federal reserve's dime. That's where the iou becomes worthless.
Nowadays, cash is an IOU for trust. The FED must raise rates to regain trust. If half of all loans default, gold is still worth, at least, double cash notes, even at a lower price. That's no counting the loss of trust (which would mean hyperinflation). Everything else will just fall faster in price. Paper cash notes would be like Confederate notes after Appomattox.
Gold is worth significantly less than the USD.
The USD is currently about two and a half times more valuable by weight than gold so gold would have to exceede 3300$/oz to surpass the value of the dollar by weight.
That is not going to happen any time soon, in fact gold is likely to go sharply lower in the short to medium term IMHO.
That is not to mention the fact that the USD is the most liquid asset known to man so on a theoretical basis even if it were trading parity it is worth more.
Also I think this article and ones like it are painting the top on the /DX at least for now.
I'm betting gold dollar bonds all lower short term, stocks and oil higher.
You're absolutely right...if you've got your head in the sand.
Good luck with "Gold, bitches!"
And what is the value of a dollar? It's is whatever somebody else says it is and it may be going up right now but be low quality toilet paper by this time next year. An ounce of gold is always worth an ounce of gold and not whatever a central banker decides it is as SNB just demonstrated.
When you need real stuff like water, food and shelter who wants gold?
Unlike most of these guys on this site, I got most of my money in US dollars. I'm betting you're right. At least for a few more months. I get nervous sometimes, though. It seems like everything is about to crash, and then I see that the gold/oil price range has seldom been higher. And I also think about no inflation, and gold shooting through the roof in the oil lacking 70s, and gold dropping like a rock in the oil glut 80s. I think you're right, but it's scary.
Only listen to Marc Chandler if you like trading monopoly money for toilet paper.
What's reason got to do with it? We're talking about a herd of limbic systems stampeding.
Also debts are extinguishable in our fiat cash system in U$D-FRN, but we already know that.
I have 100K in $USD. I'm more than happy to trade it with you for 100oz of gold. I promise, you're gonna get rich very soon. I'm talking like billions a week...just like in Weimar
Why are you holding USD then? Actually buy gold is not that easy. You could lose your shirt.