DON'T SPLASH THE POT
In 'Rounders', arguably the greatest gambling movie of all time, John Malkovich plays a Russian mobster named Teddy KGB who dominates the underground world of high-stakes poker in New York. In the final showdown between KGB and the movie's protagonist, Mike McDermott (played by Matt Damon), the mobster makes an overly aggressive play to represent a strong hand... it doesn't end well for him.
In the market's current purview, our Teddy KBG could be called Janet FRC (Federal Reserve Chairwoman). Janet Yellen is currently representing strength to the global economy by holding to a pledge to raise the Federal Funds Rate four times over the course of the year. Today, global currency traders called her bluff and went all in against the dollar because they "don't think she's got the spades."
The US Dollar had its biggest one day drop in over two months today after ISM data continued a recent trend of disappointing economic readings. In addition to the fall, the greenback also closed below support while recent trend measurements turned negative as well.
Here's the flop:
DON'T FORGET THE CARDINAL RULE... ALWAYS LEAVE YOURSELF OUTS
The problem with the Fed's pledge to raise rates four times this year is the message it sends. In effect, the Fed is saying that both the domestic and global economies are healthy enough to sustain a return to normalcy. However, the global economy is still well behind the U.S. The ECB continues to try to find a way to make the Euro work in spite of mountains of empirical evidence that the southern economies continue to desperately need a currency devaluation. China is grappling with some serious growing pains as the government tries in vain to keep the bubble from bursting. Lastly, Japan is so desperate for growth that it has driven interest rates into negative territory to try to stimulate its economy.
To add to all of these problems, a strong U.S. Dollar hasn't exactly helped things. Dollar denominated assets, namely natural resources, have seen their values plunge in the face of a rising greenback.
5-year US Dollar chart:
5-year Oil chart:
5-year Metals & Mining chart:
THE KEY TO THE GAME IS PLAYING THE MAN... NOT THE CARDS
According to Bloomberg, currency markets are pricing in less than one rate hike this year... far less than the four the Fed is pledging. By calling the Fed's bluff, currency traders are betting global weakness, in addition to recent market volatility, will prevent the Fed from hitting its target. The good news is that a less strong dollar can actually help to stop the bleeding in the commodity and equity markets.
I wrote a blog last year titled 'Through the Looking Glass' which discussed how prolonged aggressive monetary policy helped to drive equity valuations to record highs.
http://tancockstradingblog.blogspot.com/2015/10/through-looking-glass.html
However, the spillover effects of sub $30 oil have more than offset the marginal GDP utility from lower gas prices. Surpluses aren't going away anytime soon, but a less strong dollar can help to stop the bleeding.
GIVE ME THREE STACKS OF HIGH SOCIETY
So the question now is how to play a potentially weaker dollar. Here are a few ideas:
In 'Rounders', arguably the greatest gambling movie of all time, John Malkovich plays a Russian mobster named Teddy KGB who dominates the underground world of high-stakes poker in New York. In the final showdown between KGB and the movie's protagonist, Mike McDermott (played by Matt Damon), the mobster makes an overly aggressive play to represent a strong hand... it doesn't end well for him.
In the market's current purview, our Teddy KBG could be called Janet FRC (Federal Reserve Chairwoman). Janet Yellen is currently representing strength to the global economy by holding to a pledge to raise the Federal Funds Rate four times over the course of the year. Today, global currency traders called her bluff and went all in against the dollar because they "don't think she's got the spades."
The US Dollar had its biggest one day drop in over two months today after ISM data continued a recent trend of disappointing economic readings. In addition to the fall, the greenback also closed below support while recent trend measurements turned negative as well.
Here's the flop:
DON'T FORGET THE CARDINAL RULE... ALWAYS LEAVE YOURSELF OUTS
The problem with the Fed's pledge to raise rates four times this year is the message it sends. In effect, the Fed is saying that both the domestic and global economies are healthy enough to sustain a return to normalcy. However, the global economy is still well behind the U.S. The ECB continues to try to find a way to make the Euro work in spite of mountains of empirical evidence that the southern economies continue to desperately need a currency devaluation. China is grappling with some serious growing pains as the government tries in vain to keep the bubble from bursting. Lastly, Japan is so desperate for growth that it has driven interest rates into negative territory to try to stimulate its economy.
To add to all of these problems, a strong U.S. Dollar hasn't exactly helped things. Dollar denominated assets, namely natural resources, have seen their values plunge in the face of a rising greenback.
5-year US Dollar chart:
5-year Oil chart:
5-year Metals & Mining chart:
THE KEY TO THE GAME IS PLAYING THE MAN... NOT THE CARDS
According to Bloomberg, currency markets are pricing in less than one rate hike this year... far less than the four the Fed is pledging. By calling the Fed's bluff, currency traders are betting global weakness, in addition to recent market volatility, will prevent the Fed from hitting its target. The good news is that a less strong dollar can actually help to stop the bleeding in the commodity and equity markets.
I wrote a blog last year titled 'Through the Looking Glass' which discussed how prolonged aggressive monetary policy helped to drive equity valuations to record highs.
http://tancockstradingblog.blogspot.com/2015/10/through-looking-glass.html
However, the spillover effects of sub $30 oil have more than offset the marginal GDP utility from lower gas prices. Surpluses aren't going away anytime soon, but a less strong dollar can help to stop the bleeding.
GIVE ME THREE STACKS OF HIGH SOCIETY
So the question now is how to play a potentially weaker dollar. Here are a few ideas:
- GLD and metals are breaking out and trending higher as inflation concerns resurface
- Volatility will probably settle down, this can be a buying opportunity for SVXY
- Shorting opportunities on stocks that have long benefited from dollar strength
- Starbucks (SBUX)
- Nike (NKE)
- Amazon (AMZN)
- Under Armour (UA)
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