This mornings FT got some intereting headlines for the cyclical bulls like me:
Europe and US unite on stronger dollar
By Krishna Guha in Washington and Ralph Atkins in Frankfurt
The US and Europe now have a united desire to see the dollar strengthen against the euro, senior officials have told the Financial Times.
Policymakers welcome the recent rebound in the dollar, which at one point on Wednesday rallied to a six-week high against the euro. They are concerned that the currency markets have been paying too much attention to short-term economic weakness and market stress in the US, and not enough to the medium-term prospects for the US and Europe, a senior US official said.
http://www.ft.com/cms/s/0/1f5097f2-1c6f-11dd-8bfc-000077b07658.html?nclick_check=1
Before we all get major excited about this change of wording mainly from "US sources", there is obviously some sceptisme on the true nature of US interest here.
From my stand point there are several reasons why US dollar is close to cyclical low:
1. The growth cycle - US have done its job on the monetary side.
2. Trade and Current Account - Export component will add 1 pct. to GDP - and going higher
3. Recoupling - clearly the incoming European data is weakning ...
4. Crude prices - the high oil prices will depress growth world wide, but more so in Japan and Europe long term.
5. Time - the US dollar follows relatively simple bust/boom cycle - remember 2000 ? No one wanted to believe in the central banks commitment to stronger EURO, now the opposite view prevail.
6. It is in the interest of EVERYONE to have stronger US dollar. For Asia to contain inflation risk, for Europe to help reignite the growth and competitiveness, and in the US to secure long term capital flow will reverse from net outflow to netinflow.
We may be early but we are changing our view to fully committed to stronger cyclical US dollar, a view we have been having all year, despite the risk the EUR/USD will see one more final attempt to new highs, and my very sceptical view on US administration suddenly getting concerned.
My model also sold EUR/USD on the break of 1.5360 - wit stop loss above 1.5710 for the brave.
Positions
Equity - Closed to long S&P with failure to keep above 1305.00, same for Dax. Net small short through Dax puts. Long DBA - Agriculture
FX - Short USDJPY vs 105.71 cap (from 105.25 ish), short EURUSD(model - @ 1.5315)
FI - Long bunds through options - will 114.30/40 go or not? 10y 3.95% still contains 10 y. rates - watch for developement
Commodities- Crude rules. Market is starting to price deflation in as spikes in oil prices is going the net deflation trade as seen through optics of history (1970s). Given up on reaction down, and I am SERIOUSLY concerned about Middle East geopolitical crisis emerging.
Good luck,
Steen Jakobsen
1 comment:
Hi Steen,
Nice speech today, I now feel that I know your views a bit better.
I agree that crude is the number to watch as we move forward. The pressure point is getting very close I feel. The key I think is that while you may be right in your 'growth recession' scenario some countries WILL experience contraction and a quite severe one too. Italy is a prime example I feel but also Spain may join the pillory. This is not to mention the whole Eastern European edifice where I think the main MACROECONOMIC risks reside.
Fully agreed on decoupling too; this was always a tosh but what about re-balancing then? I took a stab at you today for the idea that China would transform into a consumption driven economy; I am very skeptical here. Especially, I don't feel that a rising Yuan will the effect we all want it to be (perhaps because SAFE and co. won't let appreciate it in the first place?).
I agree that we all want a strong USD, especially to reign in that oil price which ultimately as you yourself put it will end up being deflationary since it kills off consumption. In my honest opinion we WILL see deflation in Italy before this is over and all the problems with a Mad man Berlusconi.
Ok, keep it up.
Claus
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