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Is it time for the USD to show some muscle?

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November 03, 2009 – Comments (2) | RELATED TICKERS: UUP , USO , SCO

 The US dollar has been kicked, spit on, and left for dead in 2009. Gold bugs, fiscal conservatives, and doomsayers all have abandoned the US currency in anticipation of economic meltdown due to the massive amount of debt spending to slow the crisis.

But have USD critics gotten ahead of themselves?

* Oil has overshot against the USD

Since March, USD has fallen less than 20% vs the Euro, but oil futures have increased 40% in anticipation of a collapse in the purchasing power of the USD. Yet that has not happened...

[See blog for chart] 

...and as time ticks by, the disparity between the increasing inventory of oil in the market and the demand on the exchanges becomes more and more peculiar.

* Even weaker currencies have gained 30% vs USD Emerging market currencies such as the Colombian Peso, Brazilian Real, and Turkish Lira all have gained over 25% vs the USD in a just six months. Although their futures are bright, there are still significant political risk to emerging countries that is now disregarded in the purchase price.

* Lots of deflation on the horizon

The market has been bearish on the USD since March. But considering the wind down of stimulus in the next few months (Treasury purchases, MBS purchases, Cash for Clunkers) and also housing programs (HAMP, Housing Tax Credit), the deflation of reduced economic activity should be significantly bullish for the USD.

* Traders have moved to a net long position on the USD

In fact, it has been noted recently that traders have switched to a net bullish dollar position.(1) This coming after a very long period of bearish volume pushing the USD down. [See blog for link]

* USD reversal could cause market mayhem Many journalists remark on how the investment banks borrow from the Fed for free and invest in other currencies to obtain a spread. This is called a carry trade and it has helped banks such as Goldman Sachs, Morgan Stanley and JP Morgan book billions during this year. Roubini thinks an uptick in the US dollar will lead to a massive carry trade unwind.

“Everybody’s playing the same game and this game is becoming dangerous.” The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said. “The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.”(2)

The author of this blog thinks it is time for the USD to correct, but that it is too risky to play for a major spike in the USD. In the case there were unforeseen banking issues in Europe or in a significant emerging market, a run to the USD could be damaging to US banks who are leveraging USD. The author recommends buying SCO under $13 and exiting above $15.5

(1) Forbes.com, "Stronger Buck Threatens Stocks And Commodities", Ryan Campbell, Nov 3, 2009

(2) Bloomberg.com, "Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble", Michael Patterson, Oct 27, 2009

2 Comments – Post Your Own

#1) On November 03, 2009 at 8:34 PM, oshiri (< 20) wrote:

Hmm . . . this just in . . . and its not good for the greenback . . .

Gold hits record high on India purchase

http://www.ft.com/cms/s/0/0eaa4a80-c856-11de-a69e-00144feabdc0.html

Gold prices on Tuesday surged to an all-time high after India's central bank bought 200 tonnes of the precious metal, swapping dollars for bullion as the country’s finance minister warned the economies of the US and Europe had “collapsed”.

India’s decision to exchange $6.7bn for gold equivalent to 8 per cent of world annual mine production sent the strongest signal yet that Asian countries were moving away from the US currency.

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#2) On November 04, 2009 at 4:15 PM, KamranatUCLA (29.50) wrote:

about your blog. IN that blog everbank was recommended and this is what I found out about that bank:

On April 24, 2009, a class action lawsuit was filed against EverBank in the Superior Court of California on behalf of purchasers of the bank's Icelandic Krona foreign currency denominated "CDs". The lawsuit alleges that EverBank, against the instructions of its customers, closed the "CDs" at a commercially unreasonable exchange rate far below those published by financial institutions and currency exchanges, resulting in a loss of much of the "CD" purchasers' principal.[6]. On July 8, 2009, EverBank's Executive Vice President, Frank Trotter filed a declaration to the court in response to the lawsuit. In the declaration, Trotter admitted that a total of 225 investors lost $4,007,662.81 as a result of Everbank's forced closing of their Icelandic Krona denominated "CDs". That averages out to a loss of about $18,000 per account.[7]. Trotter went on to disclose that when investments in all of EverBank's WorldCurrency CDs (including those denominated in foreign currencies other than the Icelandic Krona) are taken into account, investors suffered a net loss amounting to almost $50,000,000 over the past four years.[8].


EverBank answers its phones with the tagline, "It's a great day at Everbank".

 

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