Are we repeating the same USD rally earlier this year and only to see another sell off coming? Is this deleveraging of USD funded trades over for this month? Can we say NFP? Another weak number can no doubt put all this into tailspin again!
Dollar Index March 28 2005
S&P 500 - looks like short term oversold for now. However given 10y note at 4.64%, oil > $50, the rebound of dollar may not be enough to generate flows into this stock market. If our call on shorting this dollar on this rally and high rates + commodity is correct then there is little to generate raging bull in this S&P.
Housing stocks - Can you believe that analysts raised TOL to BUY rating??? They are arguing that the Fed hike is non-effective on dampening demand since real rates are still low, low historical PE multiple, lack of supply.... are they forgetting that these ARM will kill mortgage buyers? Marginal buyers will get squeezed out? I would like to point out that RMS Index looks to retest the support at 700.
Emerging market - Ishares like EEM (Emerging Market) and ILF (Latin America) are down 9% and 11% from their peaks this year... no mercy. According to Emergingportfolio.com, EM funds lost $350m in the week ended March 23. So far there is $2.5bn inflow (versus $2.2bn for the entire 2004). JPM Emerging Bond Index Plus (EMBI+) is now at 374bp over treasury vs the low of 316bp back on March 8, 2005. Note that we didn't have to look far to see wider emerging market credit spread. Last year EMBI+ saw high of 523 and back during LTCM crisis (1998) it was over 1200. So if we get panic deleveraging, EMBI+ has a long way to go and probably their stock markets too.
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See the latest comment from Black Swan. They are calling for dollar bottom and of course Marc Faber is calling for USD being the only asset to rally this year!
My view is that the story remains the same, can US attract more saving and more capital investment? Can foreign CB afford to not diversify its reserve when they have a chance to? Can US grow fast enough to save herself and the world out of this current account deficit problem? Is the housing bubble going away from this higher interest rate? I don't think so!
Although increasing rates in US might boost saving rates, I can hardly see more asset coming into US. I think that amid a big flattening of short dollar position (especially in usd/jpy). Risk reward remains to add dollar short.
Latest CFTC positions as of March 22 shows AUD increased long into this price weakness. The price action certainly shows very sticky aussie price (AUDEUR). Yen reached it biggest short in 4 weeks. Cad longs up 20%. WTI and Gold are moderate long.
Two things striked me from those positions: Market is expecting usd/jpy (prob usd/asian too) to be higher... that feels more like a breakout trade since carry has not been a great indicator for usd/jpy. And for Aussie, this long position has been building up since year start. The CRB correlation, to me, is mild overall but maybe higher for the recent mths. Perhaps the higher interest rate in AUD will help to hold its value versus countries which is clearly struggling like Euroland.
Finally, AUD/JPY (@82.46) has been relatively stable even though the positioning suggests higher AUD/JPY... so perhaps on any unwind on this AUD or JPY position, we will see much lower AUD/JPY.
I like the lower EUR/JPY trade especially if BOJ may eventually diverify into EURO and even intervene EUR/JPY rather than USD/JPY. They have not intervene USD/JPY for a while (at least 3 mths in my memory).
From the EUR standpoint, japan is a 15% trading partner (UK is 24%, US is 25%, Swiss is 9%).
A response to BCA's article that fish mentioned:
The author wrote: "... The fact that the backup in Treasury yields has not sparked a global bond bear market highlights that global economic conditions are not conducive to significantly higher yields. Inflation pressures appear benign outside of the U.S. It also suggests that the Treasury selloff will quickly cool if there is any hint of an economic slowdown in the U.S."
I think that this is true for a short term and localized point of view. However, if the higher US rates leads to housing bubble or any US consumer slowdown, we will see the troubles elsewhere. so higher rates has to feed through given US consumer is the large driver a global economic growth in many areas.
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