Before You Get Too Excited About The Dollar, Let’s Review The Macro Backdrop
Last week, whether by skillful trading prowess,
luck or a little of both, we managed to get long the dollar just before the
solid move up off the lows. We were then fortunate to exit those positions at a
key resistance level on the dollar index on Friday (courtesy of my colleague
Todd Gordon) and since then the dollar has sold back off and broke through key
fib support at 81.77 which would from a technical standpoint re-establish the
trend lower in the dollar. So was last weeks move a correction? It would
appear so.
It is easy to get
excited about a bounce after such a long move lower thinking that perhaps you
have just nailed the mother of all bottoms, but this is where a good overview of
the macro backdrop will set one straight. Let’s review.
While it may be readily
accepted that the dollar, on a trade-weighted basis, is undervalued by about 10%
and it has been undervalued for most of the year despite the continued push
lower. Is there a disconnect between what is deemed fair value and current
market value, thus resulting a trade opportunity?Â
Currencies can
and do deviate from their fair market values for extended periods of time, this
time is no different. A recent study by Goldman Sachs concludes that regardless
of the 10% undervaluation on the dollar, until the US current account deficit
represents only 3% of GDP versus the current value of 6%, the dollar will likely
continue its slide. There is simply no evidence that indicates that the
situation is getting better. Â It may take 1-2 years before a meaningful
improvement is seen and hence a sustained rally in the dollar.
Open
Positions:
Long EUR/CHF from
1.5320
Trades on our
radar screen:
Short USD/JPY
Short USD/CHF