A Dollar is What I Need

As what will be an interval greatly shortened by the Thanksgiving Day holiday dawns, traders and investors seem happy to continue where they left off on Friday, buying stocks, selling currencies, and giving bonds a fairly wide berth.

A little respite would not be entirely unwelcome after a period in which we have experienced record setting moves and switches of positioning in the likes of copper – where the latest numbers from the regulator show the non-commercials now boast a tally of net longs only once briefly topped – and that way back in 2003.

Some of the changes in bond prices, too, have been surpassed only a couple of times before, amidst such upheavals as the GFC or at the extremes of Paul Volcker’s onslaught on inflation, back at the start of the 1980s.

The dollar’s rise has since become the latest contender for the 2016 Hall of Fame, with the past three weeks’ move against the yen, for example, being the most vigorous since ‘Mr. Yen’ – Eisuke Sakakibara – was driving it relentlessly lower in the mid-1990s, in the aftermath of the so-called Tequila Crisis and only otherwise exceeded in the whole floating rate era way back in 1978.

To give a sense of this exception to the statistically minded, this ~10% plunge is 3.8 sigmas above what is typical for a like period – an event which, on the assumption of normally distributed changes, should occur once every eight centuries or so.

As a result of the greenback’s new found favour both here and against a whole host of other currencies, the most widely followed – if least well-constructed – version of its trade-weighted index, the DXY, has made a 14-year high, largely thanks to weakness in the euro and closely tracking Swiss franc components which dominate its composition.

That said, on the much more representative Broad index compiled by the Fed, the dollar also lies a within a few percentage points of its best ever levels, though it is not nearly so elevated if we factor in the differences in the rates of inflation between the various countries whose monies are included in what we designate as that same basket’s ‘real’ version.

Nevertheless, this has started to give rise to fears that, on the one hand, all those other countries who have the borrowed the US dollars with which to conduct their business – because of their convenience and general acceptance – will now be facing a nasty increase in the effective cost of paying them back.

Likewise, the first rumblings are being heard about what the impact will be on the roughly one-quarter of US profits which are earned abroad in euros, yuan, and sterling, and so forth.

For now though, the short term focus remains on the concrete fact that the S&P500 has registered its first year-on-year increase in earnings since the shale bubble burst in the second half of 2014, as well as on the more subjective feeling that the Trump presidency is about to usher in a golden age of economic expansion, at least for those fortunate enough to conduct their business within the United States themselves.

Thus, the heady waft of slowly roasting turkey has been accompanied by new highs in the Russell 2000, the Dow Jones Transports, and the Value Line, too, with the S&P itself agonizingly refusing to register the last couple of pips to join them.

Enjoy it while it lasts.

[This is a lightly edited transcript of a piece first broadcast on WRS radio in Switzerland on November 21st: Go HERE for a podcast]

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