Do You Really Want To Short The U.S. Dollar?

Currencies / US Dollar Nov 02, 2009 - 04:56 AM GMT

Lets face it…everyone seems to hate the US Dollar…Seems every Forex trader wants to be short the US dollar. So many think the US dollar will crash ( maybe it will..who knows).. but what I do know as a commodity trader..when too many traders are on the other side of the boat… something happens. My short on the US dollar was recently taken out.

What is interesting is that Nouriel Roubini is starting to speak about the US dollar carry trade. A carry trade is when traders/ speculators borrow in one currency and buy assets in more risky currencies… I remember the blood bath for the Japanese Yen in 1998 when the Yen carry trade blew up. Julian Robertson took a major hit as well as countless commodity and forex traders. The US dollar has replaced the Yen and is the now choice of potential danger. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

Traders who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets ( Aussi…New Zealand… Brazil’s Real) and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions. Trades like this do not last forever…

Is the mother of all carry trades and mother of all highly leveraged global asset bubbles fermenting?

No one knows the catalyst why/ if this can end… but the US dollar will not fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts.

Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring.

Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later.

Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

How many forex traders, commodity traders or simply speculators will be caught on the wrong side of this trade? Probably countless..

What is the point… trade with a plan…do not trade the news..realize anything can happen…because it will happen…

Andrew Abraham
www.myinvestorsplace.com

Andrew Abraham has been in the financial arena since 1990. He is a commodity trading ddvisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

Visit Angus Jackson Partners (http://www.angusjacksonpartners.com) Contact: A.Abraham@AngusJackson.com (mailto:A.Abraham@AngusJackson.com)

© 2009 Copyright Andrew Abraham - All Rights Reserved
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