Tags: US | dollar | euro | yen

The Illogical Trade — Buy the US Dollar As Economy Flounders

By    |   Wednesday, 24 Sep 2014 08:04 AM

The U.S. dollar has seen an impressive strengthening in the past three months. That is a fact that has many analysts, including me, scratching their heads.

Very early in my trading days, I was taught the golden rule: The market is always right and can stay illogical longer than your deep pockets can.

We have seen the U.S. dollar strengthen across the board against nearly all currencies of the world. The worst of the currencies in the last month has been the Japanese yen. Just a few weeks ago I wrote to you about the insanity that Prime Minister Shinzo Abe has unleashed upon Japan and how it will lead to no good.

The United States is following in Japan's footsteps and yet we see the U.S. dollar soar.

One of the pillars of the growth in the U.S. economy is consumer spending. The most popular measure of consumer spending is the Personal Consumer Expenditure (PCE). In 2013, we saw this indicator rise or stay flat every single month. In the first half of 2014, we have seen the PCE rise in three of the six months and fall in the other three. So we have no clear indication and actually deterioration compared with 2013.

The next tenet of U.S. growth is the housing market. Here again we have seen tepid to inconsistent signals of growth. The data indicate that while we have growth in the housing markets compared with last year, we are at about 50 percent of what is a normal growth pattern. Each month in the last several years has had contradicting signs of the growth. So there are pockets of growth, but no consistent growth.

Jobs are another anomaly in our data. The unemployment rate came down, but more so due to people who have stopped looking for jobs. The politicians claim we have recovered all the jobs lost during the recession but forget to mention that we traded high-paying jobs for minimum-wage jobs. Sustainable economies cannot be built on minimum wage jobs. Don't forget the data massaging we see in the unemployment numbers that cast a dark shadow on that metric anyway.

Yet the U.S. dollar has been soaring. This dollar strength will actually hurt the tepid recovery that we may be experiencing in the United States. The United States may be a service economy, but we still manufacture quite a bit in the United States. With a strong dollar our exports will suffer. The strong dollar will already reduce GDP by approximately 0.3 percent to 0.5 percent this year alone.

The dollar strength sentiment has been helped by the Federal Reserve stopping quantitative easing. This is no indicator whatsoever of an increase in interest rates, just a reduction of stimulus. The euro losses are all self-inflicted for the most part. That has also boosted up the dollar. The collapse of the yen is another failed attempt by a politician and that has pushed up the dollar.

Manipulation in gold prices along with weak demand for commodities has crushed the Canadian dollar. The temporary weakness in China's growth has pushed the Australian dollar down.

With all the inherent and obvious weakness in the U.S. economy, we should be selling the dollar, not buying it. Yet today I suggest we buy the U.S. dollar and sell the euro and yen, as we will continue to see weakness in other currencies and strengthening of the dollar.

As my mentor used to say, "Never cloud your trading with economic facts (in the short term) when sentiment rules the markets."

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The U.S. dollar has seen an impressive strengthening in the past three months. That is a fact that has many analysts, including me, scratching their heads.
US, dollar, euro, yen
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2014-04-24
Wednesday, 24 Sep 2014 08:04 AM
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