From The Macro Tourist:
In July I wrote a piece titled, “Is the real US Dollar Pain Trade Lower?”. At the time the US dollar was sucking wind, but many traders were still playing for a bounce. The prevailing wisdom was that the Fed’s tighter monetary policy, combined with Trump’s business acumen, along with a tax reform bill, and topped off with a massive short covering surge from emerging market US dollar denominated issuers, would ensure the two-year US dollar rally would continue.
In the article, I quoted Luke Gromen, who said, regarding a move down to 80 in the DXY, “…while COT (committment of traders) [data] shows more are cautious on the USD, as best I can tell, there isn’t a soul that thinks this kind of move is even possible.”
Yup, Luke was bang on correct, during the summer, precious few believed the US dollar would go down, forget about plunging more than 10%.
Earlier this year, according to most market participants, US dollar strength was inevitable due to all the reasons I suggested. Although Luke had been arguing his US-dollar-loss-of-reserve-currency-status theory for quite some time, apart from Grant Williams and some other hard money guys, Luke’s theories were not gaining traction. Hedge funds were much more enamoured with the soothing sounds emanating from the USD bullish investing crowd. The idea of the US dollar losing its reserve status was laughable. I remember suggesting something to that effect to a colleague and he chuckled, “what will possibly replace the US dollar? The Euro? The Yuan?”
Yet today, Luke is a rock star whose theories about the loss of US dollar reserve status are all the rage. Hedge funds and other traders are positioning their portfolios to take advantage of the coming US de-dollarization.
Now, don’t misconstrue this next part of my argument. Luke is a unique, big picture thinker that everyone should take the time to understand. No sense rehashing his arguments. Instead, if you haven’t listened to it, head over to MacroVoices to hear Luke’s interview. Although I agree with Luke’s long term conclusions, my quibbles have all to do with the timing of this inevitability....MORE
