Contrarian Bet – The US Dollar Is About To Rally

Everybody and their dog seems convinced the USD is going to run off a cliff right now. The weekend’s G20 meeting did little to avert that assertion. Recent ‘the dollar is dead’ claims seem so shrill that, for the fun of it, we’ll stick our contrarian neck out here and say that the USD is about to rally. We’ve annotated the chart above at the point of this assertion, and we promise to update it before the end of the year, whether we are right or wrong in our prediction.
Of course, this all has implications for the immediate direction of the loonie, the stockmarkets, commodities, gold… but we’ll focus this prediction on the USD itself. For the record, this is a short term bet, and we’re not inordinately attached to the USD as an investment vehicle longer term. And everybody should do their own due diligence, naturally.
Below we’ve collected a few sample quotes from today’s news that are bearish the dollar, to contrast with our prediction, and to illustrate how convinced many are that the buck is tanking.

Quotes and headlines from today:

Dollar at Risk of Becoming ‘Toxic Waste’CNBC, 25 Oct 2010

‘G20 agreement unlikely to stop U.S. dollar’s downward trend’Financial Post, 24 Oct 2010 Excerpt: “This outcome should reinforce downward pressure on the U.S. dollar” – Todd Elmer, head of G-10 currency strategy at Citigroup

“The driving theme for the markets remains a lower U.S. dollar via [quantitative easing] for floating-currency countries and higher current account imbalances for managed-currency countries.” – Andrew Busch, global currency and public policy strategist at BMO Capital Markets, Globe and Mail, 25 Oct 2010

22 responses to “Contrarian Bet – The US Dollar Is About To Rally

  1. So let me get this straight, you are making no actual “bet” whatsoever, you are simply make a contrarian statement and you think this is some big thing? Well guess what, you have a 50% chance of winning your nothing-bet! Good luck!

    • Ray, the point is that I’m suggesting I have a more than 50% chance of ‘winning’ this ‘nothing-bet’.
      That’s why it’s a prediction.
      Try to play along!

      • The point is why on some random day do you make some random prediction and then think that tracking it again at the end of the year is some incredible event. I can tell you right now that I’m on pins and needles waiting for the followup to this article on Dec.31st. Maybe tomorrow you can take a look at a stock, say VXX, and predict whether you think it’ll go up or down within 78 days from now and followup on day#79 with a whole post telling us what it did, too.

      • Ray:
        Do you do much investing or trading?
        If you, do/did, you’d understand the point of this exercise.
        If you are able to predict the coming direction of a dollar move (or any other instrument), with even very modest accuracy, you can capitalize on it.
        If you can raise your predictive capacity from 50:50 (chance) to 60:40 or even just 55:45, you can be a very successful investor.
        Your scorn (puzzlement?) is perplexing, as this type of challenge is the very essence of trading and investing.
        Perhaps you’ve given up on thinking about markets in this fashion?

        By the way, VXX isn’t a stock. It’s a synthetic futures instrument that tries (not very successfully) to move with volatility measures, in particular, with the VIX. And, BTW, if the dollar rallies here, the VIX (and VXX) should rally, too. Don’t buy and hold VXX, for anything but the shortest time periods, as it experiences ‘slippage’ that decreases your returns.

  2. Did someone wizz in your cornflakes, Ray? The guy’s stating that he thinks the USD is overvalued on a near-term basis. I agree. If people want to invest accordingly, they can do their own due diligence. Any time you invest or make any statement about a particular asset, you have a 50% chance of being right or wrong. So what’s your point?

  3. VREAA, also consider that net spec positions in the USD are still highly negative.

    • Thanks for the comments and the link.
      So, commercial traders are roughly flat the USD [right y-axis].
      How has this worked as a prognosticator of future market direction in the past? [Genuine, not rhetoric, question. Anybody know?].

      In some futures markets the underlying assets can rally even in the face of large commercial short positions (gold is an example). This is likely because, in those cases, many of the commercial (smart money) positions represent hedges. I’m not sure what the USD story is. Obviously, this is not a data point that has contributed to my prediction.

  4. So if the US dollar falls: do commodity prices rise and the cost of imports rise leaving fewer dollars to purchase consumer items produced world wide; leaving exporting countries with no other alternative but to use currency intervention to decrease the value of their currencies, which has the net result of increasing the value of the US dollar?Or has the global economy managed to break away from this paradoxical link to the US economy? I think that the weaker the global economy the stronger the US dollar. Only a stronger global economy will allow for a measured drop in the US dollar.

    • It’s still linked, and it will continue to do so.

      I am sure there are many countries who’d like nothing more but getting rid of their dependence on the USD but there is no real alternative right now.

      The Euro? Trash talked by the press.
      The Yen? Just look at Japans economy and the size of the market.
      The Yuan? Maybe, but nobody wants to give the Chinese that much power.

      If we do get rid of the Dollar dependency it will take a while and it will most likely mostly happen behind the scenes where people will still denote goods and service in USD but then make an agreement to pay in an alternate currency.

      Breaking the Dollar role right now would result in some serious pain for everybody, considering that no Government so far seems to have shown any kind of resolve / willingness to do the right thing don’t hold your breath about the end of the USD.

      And yes, I am with VREEA, I also see a (short lived) Dollar rally.

  5. I thought the Fed announced that they would intentionally depreciate to help the economy. (And then China got sort of mad because that’ll make their inflation go crazy-pants.) I haven’t been paying close attention, but did I just imagine that?

    • They haven’t literally stated that, no, but it’s what many foresee.
      They do want China to strengthen the yuan, though.
      At the same time, the treasury secretary is making noises about a strong dollar (but then they’ve always given that concept lip service).

  6. The dollar has painted a second higher low off the 08 bottom. A supporting trend line is now in place. On the daily charts its also painting reversal candles most likely meaning there is support at this trend line.

    Look for a corresponding stock market correction to go with this dollar rally.

    2 major events may get the ball rolling, US elections and disappointing QE2 promises.

  7. With only 3% dollar bulls, long downside wick on multi-year support, huge spread between Copper and USD, conditions for rally are in place.

  8. My money’s on the PMs (SLW, FR, NG, HZU, etc). The Dollar *might* bounce here, but I doubt it. If you want to catch the squiggles, be my guest. I will sit tight, add if necessary, and catch the bigger fish…

  9. if you chart the CAD vs. the DXY, you’ll note that when the DXY rallied from 75-89 earlier this year, the CAD didn’t actually move very much. only a nickel. Still right smack in it’s trading range.

    • Agreed. We wouldn’t expect the US$ to strengthen by exactly the same degree against all other instruments (loonie, stocks, basket of foreign currencies (as per USD index), silver, gold, etc) but this is a prediction that it’s going to strengthen against most.
      [The USD index does include the loonie, as you likely know]

  10. Scavenging for nickles in front of the steam roller is a risky business, VREAA…. 😉

  11. For technical reasons it may want to rally here, but the question is what ,if anything, the Fed will try to make it do. “Don’t fight the Fed” has been a mantra down here for a long time. Never moreso then over the last two years.

  12. What’s the best way to set oneself up with forex trading? My bank’s rate is 2cents above the going rate for each conversion. So if I converted CAD to USD, then converted back, I’d have to make a 4% gain right off the bat just to break even.

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