Over the past year one of the biggest themes has been to short the US Dollar and go long anything that is considered risky.  If you bought stocks, any grade of corporate bond, commodities, even real estate stocks and you would have made money.  Many strategists, The Macro Trader included, used the falling US Dollar as a reason to go long stocks, bonds, commodities, etc.  The reason of course is that since the March bottom the USD and the SP500 have been almost perfectly inversely correlated.  Well that relationship appears to be breaking down right now as the US Dollar has been rallying and other risk assets have not been falling in sympathy.

In the chart below you can see how as the US Dollar has fallen, the SP500 has risen.  In fact when there is a wiggle in the USD there is an opposite move in the SP500.  As you can see in the bottom right hand corner the USD is rallying while in the top right hand corner the SP500 is still looking strong. (Click on chart twice to enlarge)

US Dollar vs SP500

Of course if this inverse correlation is falling apart the correlation between the SP500 and the Euro is also falling.  Apparently, at least for now, you are able to be short the EUR/USD and still be long stocks and make money.  Looking at the chart below you can see almost the exact opposite of what we see with the US Dollar.  As the SP500 has moved higher the Euro has climbed as well until the last few weeks as the Euro has tumbled and equity markets as well as other risk assets have managed to remain strong and in many cases hit new highs. (Click on chart twice to enlarge)

Euro vs SP500

What do we take from this?  One thing is that the carry trade using the US Dollar was not as heavy as many people feared.  Another thing is that the market is always changing and that many intermarket relationships work well in some periods and fall apart in others.  As always it is important that we have solid risk management principles and that we are open to change.  For now we are short the EUR/USD and long equities…but that could change tomorrow.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is long several equity index ETFs such as IWF, EWZ, and MOO and we are short the FXE-Euro ETF.

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: US Dollar Correlations Breaking Down
URL: http://www.themacrotrader.com/2009/12/16/us-dollar-correlations-breaking-down/

Bookmarks

Yesterday we wrote about how we feel that the Euro is headed lower due to overvaluation, the technical picture, and market positioning.  In light of that we thought that we would show the technical picture of the US Dollar index.

In the chart below you can see a chart of the US Dollar index all the way back to 1971.  In the lower panel we have plotted the distance from the 200-day sma shown as a percentage.  Not surprisingly the index rarely strays more than 10% away from the 200-day.  In fact since 1971 it has only gone above or below by 10% 11 times.  Since 1992 it has only breached the 10% level once back in 2008 in the midst of the financial crisis. Right now we are close to the lower levels of a typical move.  Could it go lower?  Of course the answer is that yes it can, but if history is any guide we doubt that we have much lower to go before a decent sized bounce. (Click on chart twice to enlarge)

US Dollar Index

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter we are currently short the EUR/USD

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Is It Time To Buy The US Dollar?
URL: http://www.themacrotrader.com/2009/12/10/time-for-us-dollar/

Bookmarks

We have been bearish on the EUR/USD for some time now.  Some investors are convinced that the USD is going down forever and that the US is the next Zimbabwe.  The reality is that while the United States has a ton of issues such as the huge and rapidly expanding deficit, the rest of the world is not exactly in great shape either.

One of the weaker areas of the world happens to be the European Union.  They continue to have issues such as Spain and its almost 25% unemployment rate, the IMF estimate that EU banks have only written off 50% of their bad debt, and the potential for major defaults in Eastern European nations.

The timing for a short position is starting to look right.  As you can see in the chart below on a purchasing power parity basis the Euro is 35% overvalued to the USD.  In previous periods of over and undervaluation this is past the levels that are typically seen before a reversal of trend. (Click on chart twice to enlarge)

EUR/USD PPP

Another indicator that we follow is that of FX risk reversals.  Risk reversals essentially show how option traders are positioned.  A negative reading means that option traders expect a move lower and positive reading mean that they expect a move higher.

Typically we look for contrarian signals at the extremes, usually when the reading is very negative or positive the trade is crowded and the price goes in the opposite direction.  This time however is a bit different as option traders are extremely bearish but the spot price has remained strong.  Because of this we suspect that if the price breaks we could see a swift move lower.(Click on chart twice to enlarge)

EUR/USD 25R 3M Risk Reversal

Looking at the chart below of the Euro ETF you can see that the price has broken below its current trend line.  In the lower panel you can also see that we also have had a momentum divergence during the last part of the advance.(Click on chart twice to enlarge)

FXE-Euro ETF

All of these signs point to a lower Euro.  We think that the timing is right to dip our toes in the water.  If the trade starts to move in our favor we will be looking to add to it as it could move quite a bit lower due to how overcrowded the trade is, valuations, and the fact that the EU in our view is just as broken as the US.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-we are currently short the Euro in The Macro Trader newsletter.

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Is it Finally Time To Short The Euro?
URL: http://www.themacrotrader.com/2009/12/09/shorting-the-euro/

Bookmarks