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The Dollar Is Telling Us Something

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Look at this chart and you can see that the dollar is about to move up through the 89 day moving average. This recent move came from nowhere, and it it breaks through this average, we could see a move higher that will continue to push down commodities, gold, and oil.

The move started with the much better than expected unemployment report, and the fact that investors are anticipating the Fed will raise interest rates sooner rather than later given the prospects for better employment numbers. The move then picked up steam as the Dubai debt crisis hit and there was a flight to quality move into the dollar.

The real question is whether it is sustainable. More and more institutional investors are repositioning their portfolios for a strong dollar. But, in doing so, they are buying into the theory that the economy is fully on the mend and that we will be seeing strong growth ahead.

I’m just not there yet. There are still some strong headwinds ahead of us that could derail this fledgling recovery. We may have acceptable GDP growth numbers for the 4th quarter, but it just doesn’t seem logical that those numbers can continue if the Fed does as they say are planning to do with regard to removing the monetary stimulus.

I can come up with a paranoid scenario for the rise of the dollar based upon Abu Dhabi’s need to pump significant amounts of oil to cover the financial problems with Dubai’s commercial real estate. This would give us a window of about six months of increasing dollar strength as they deal with the debt issues there. However, there is no evidence of that at this point, just speculation.

At this point, until we move through the 89-day moving average I am going to continue with the thesis that this is just a counter-trend rally. You can see that we tested the trendline and fell back with a lower dollar today. We are sticking with our plan that has worked so well so far – keep our equity positions in tact but keep stop losses in place to protect against the downside.

Right now, our stops are concentrated in energy, financials, and industrials – the early cycle stocks that have performed so well so far. We will likely add stops for other cyclicals, commodities, and emerging market positions – all of which will move down if the dollar makes a sustained move higher.

Mark