The Short Dollar Trade is Getting Very Crowded

Zerohedge’s article from this morning tells you all you need to know about how offside the markets are becoming vis a vis the FOMC’s policy plans. People can scream to high heaven that the U.S. dollar is toast but that’s not the way these things work. We’re getting really close to a panic moment where everyone is on one side of the trade, and that trade right now is short dollars.

The reaction to today’s FOMC statement is another moment where the market doesn’t believe the Fed will continue to raise rates or unwind its balance sheet. But, the market is wrong.

The Fed is going to do both of those things this year. When things get this crazy, that’s how bottoms and/or tops are made.

A dollar in free fall with improving balance of trade numbers and an ECB far more trapped than the Fed is is not a recipe for a further collapse of the dollar. It’s a silly notion. I wouldn’t be buying gold or silver here. Both are telling you that the dollar isn’t ready to collapse. And while the market may not like what the Fed is selling, the market isn’t going to stop the Fed from doing what its going to do.

With stocks at all-time highs and real estate prices surging the Fed is going to unwind its balance sheet and begin withdrawing liquidity. The lower the dollar goes and the higher stocks go, the more resolute the Fed will be in this.

What is weighing on the dollar right now is not the a collapse in faith in the Fed (though jawboning is having less of an effect) it is collapse in faith in Congress to manage the U.S.’s finances. And that, my friends is what is causing this dollar bearishness.

But, also note, that yields refuse to rise significantly. Because foreign central banks are loading up on U.S. Treasuries, reloading after the last strong dollar wave at lower prices.

Moreover, they are holding these Treasuries onshore, not repatriating them to make them part of their long-term reserves. This is the very definition of preparing for the next upleg in the U.S. dollar. So, that when the dollar bottoms here, they will be ready to dump Treasuries into that strength to defend their currencies from depreciating too much.

Accumulation by Foreign Central Banks is Purely Increasing Liquidity in Case of a Dollar Bull Market

Bottom line, there will not be a crash of the dollar because dollar-based assets are not in the biggest bubble. They may be over-valued relative to gold, or even cryptos, but they are not over-valued versus Italian or Spanish debt.
Or how about Brazilian corporate debt.
Or Canadian Real Estate Debt.

These trades look good now, and Yellen may have a little egg on her face between now and the September FOMC meeting, but the further to the upside the euro goes while gold languishes below $1300, the more offside that move looks.

I’m not saying the Dollar can’t go lower, but the lower it goes here, the more violent the snap-back rally will be.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s