Thursday, November 19, 2009

Goldman On The Dollar Carry Trade: "A 20% Reversal In Either 3 Months Or 3 Days"

From yesterday's "Everybody's Dissing the Dollar":
I don't have anything concrete I can point to but 1.50 EUR/USD almost feels as if someone has drawn a line in the sand. As more and more money piles into the trade without movement past that line you start to lose the mo-mo traders and the psychology can shift fast.

If the buck were to turn and head back to say, 1.20, the results for equities and gold would be painful.
I'm just sayin'...
Today a reader emailed this ZeroHedge post:

As the decoupling between cause and effect continues: i.e., the economy and the stock market, more and more pundits focus on the dollar carry trade as the primary culprit for market appreciation. With the US market flat for the year when indexed for the decline in the dollar, the entire rally has been one big window dressing to prop up Obama's confidence boosting propaganda. Yet the entire rally, aside from the unique technical peculiarities underpinning it (short squeeze, low volume/high momentum algo participation) has been carried on the back of the dollar's decline: take away the concept of importing inflation at all costs (which is what Bernanke is happy to continue doing) and US deflation would have been rampant by now, proving the Fed's plan to liquefy the capital markets to be a disaster. As such, the only thing that allows the "rally" to continue, is the willingness of the Rest of the World to fund not only the skyrocketing US budget deficit, but the Chinese trade imbalance, courtesy of the yuan-dollar peg.

The rally will come to an abrupt end when one of two things happens: i) the Fed gives an indication it wants investors to stop chasing risky assets (likely not for at least 5 years) and ii) the rest of the world realizes that America has no leverage whatsoever, with its crumbling economy, and its loose monetary policy which as prominent Chinese figures have already determined, is currently causing asset bubbles worldwide (yet which the Chairman is unable to see). Possibility ii has a much greater probability of occurring, yet if and when it does, will be dependent in great extent on the future of the dollar carry trade.

Nouriel Roubini has already pointed out the great danger posed by every single trader in the world being short the dollar. As we saw on Monday, one word out of place by Bernanke, and the reversal will be disastrous. Below we present the thoughts from Goldman Sachs, which, as expected, is much more sanguine about the impact and the participation in the carry trade. To Goldman, the dollar value is merely a function of the US economy's weakness. Ironically, Goldman has been pumping up the strong economy story for much of H2, until recently when even 85 Broad has reversed its opinion. While Goldman's observations are not surprising, the question emerges as to how the firm is positioned now to make the higher amount of money from a macro picture, as very few trade on company-specific alpha: courtesy of banks like Goldman, every asset class has become one big beta bucket....MORE