Morning Note: Speaking of the Dollar

Asian equities, no surprise, got hammered overnight, with all but 2 of the markets we track closing notably in the red. Europe’s sliding as well this morning, with all but 3 of the 19 bourses we follow trading lower. U.S. stocks have been all over the place this morning: As I type: Dow down 40 points (-0.15%), SP500 down -0.16%, Nasdaq down -0.10%, Russell 2000 down a big -1.48%. 

The VIX (SP500 implied volatility) is up 4.86%. VXN (Nasdaq vol) is up 2.36%.

Oil futures are off -0.18%, gold’s down -0.36%, silver continues its “correction”, down -1.98%, copper futures are down -1.80% and the ag complex is flat, no change so far this morning.

The 10-year treasury is appropriately catching a bid (yield down) and the dollar (to the chagrin of risk-asset bulls and defensive commodity [read gold] buyers alike) is once again in the green, +0.16%.

Our core portfolio continues to fall somewhere between it all, off -0.36% as I type.

Speaking of our core mix, in case you’re wondering, despite its present dollar sensitivity — while a 1.33% decline (assuming you’re fully invested) in a day (yesterday) is not a welcome site — it held up well relative to the major US equity averages: Dow -1.92, SP500 -2.37%, Nasdaq -3.02%, Russell 2000 -2.41%.

In terms of how our core has fared during this “correction” that began on 9/2; thus far — at -4.34% for the period — it’s captured notably less of the hit vs the averages: Dow -8.03%, SP500 -9.60%, Nasdaq -11.81%, Russell 2000 -9.41%. 

And while we welcome the above relative performance analysis, we recognize that the bulk of our hit came this week as the dollar rallied: As of last Friday our core was down only -0.89% during the correction, while the major averages were already notably in the red.

I’ll put out another quarterly performance video in early October.

Speaking of the dollar, and the headwind it presents:

12 days ago I wrote:

“Lastly, having mentioned the dollar, and given its direct impact on all things commodities, as well as our “Narrow Road Out” thesis, I’ll finish up with a few more visuals:

Here’s our standard US Dollar Index chart, which features (bottom two panels) two technical indicators (bullishly diverging) that suggest upside momentum may be gaining a little steam:

And here’s the latest “Commitment of Traders” report showing that speculators are notably net short the dollar, like they haven’t been since early ’18:

Should the dollar move against those shorts — should it spike higher — they’ll be covering (buying) and exacerbating a rally.
Speculators in the Euro (the largest counter influence to the dollar), on the other hand, are hugely net long:

I.e., lots of potential selling pressure should the Euro correct from present levels (which, by the way, are, to say the least, lofty). And note the bearish divergence in the bottom two panels:

Bottom line: For now, improvement notwithstanding, macro conditions remain suspect, and the dollar bears very close watching going forward.”

So, yes, while we were very much in the minority, we had reason to believe that a dollar rally was in the near-term offing.

Here’s Bloomberg’s Lisa Abramowicz yesterday:

“The past four days have seen the biggest strengthening of the dollar versus its peers since the March turmoil, as measured by the Bloomberg dollar spot index.”

While we can join with the media (the noise) and (other than the technical setup we identified above) attempt to explain away the dollar’s move — which of course we do constantly as we note all developments and forever reassess our theses — suffice to say that, regardless of the reasons for recent dollar strength, our opinion that a strong dollar is anathema to risk assets these days is being more than supported by the evidence. 

Now, that last paragraph said, a spike higher in both risk assets and the dollar, simultaneously, albeit briefly, is certainly a possibility (although not assured given the dollars “haven” status) in the event that a market-friendly fiscal stimulus package gets passed.

Have a great day!



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