Market Thoughts – Are You America’s Friend or Foe ? USD is Not Cool.

Scrolling through my email’s In Box, I am stumped by the number of synonyms of the words STUMPED and STYMIED in the various titles of fx market commentaries, analyses and reports I have received in the past week.

STUMPED = STYMIED = Bizarre = Frenzy = Bewildered

And you really cannot blame them, the analyst, the chartist, the strategist or the economist, waking up each day to dissect the market in the way they know best. But nothing has gone right lately.

The worst call banks have made in FX this year has been the USD call which is the logical call most have piled into and still remained vested in. (Not to mention the taper sell bonds calls)

In fact, this is one of those rare years where almost every asset class has rallied in synchrony so far.

The 4 top positions of fund managers currently according to Citi are as follows.
1. Short EUR
2. Long USD
3. Short JPY
4. Long NZD

Some hypothetical technical portfolios are showing horrendous returns on the year, stopping out of short GBP, looking ugly on USDCHF, USDJPY etc and barely hanging on for short EURUSD.

The USD is taking a beating and the big mystery of the year is that no one knows for certainty who is doing it or why with most reasons given to market positioning and stop losses, missing out the invisible central bank and their reserves flow, along with sovereign wealth allocation activities.

Faced with plunging Obama popularity, blockades on Russian money, BNP embargoed from USD settlements and the US Supreme Court blocking USD payments for Argentina, I suspect sovereign powers are nervous about the US and the USD as a safe haven asset these days.

Europe looks, by far, a more amenable and neutral choice.

When we look at the DXY Index which is 57% EUR, 13% JPY and 12% GBP, the USD has underperformed on the year even with the real threat of negative interest rates in Europe.  But the results of the USD against the rest of the world is hardly credible with most major currencies registering broad based gains against the USD for the year with the exception of a few like the CNY, SEK and RUB.



And even the amongst the rest of the world, the USD is lagging with 114 out of the 176 currency pairs quoted against the USD in Bloomberg outperforming year to date.

My hypothesis is that geopolitical risks are playing a bigger role in global fund flows than we think. The players are governments themselves.

Friends of the US can keep the USD but those who are not sure about their friendship better not be holding on to too much of it. Because you never know when the US might decide to freeze your assets for petty crimes like dealing with Russians ?

Wise old China has moved in to internationalise their currency, choosing to settle in their own money and setting up CNY hubs around the world including London, except in the US.

My opinion is that the current market levels are signs that the USD is losing clout more quickly than we think. And the biggest alternative to the USD is …. the EUR.

Whilst EUR carry trades still appear to be the majority opinion of fund managers and strategists and they have shifted the view to a medium term one as the EURUSD has demonstrated remarkable resilience into the half year end.

From 1 May 2014 vs EUR

The EUR has outperformed against the USD in the past fortnight even as short EUR positions in the market build to a new 1 year high.


That is because as layman logic lies, the EUR is still a short but as far as national reserves are concerned, the USD is a “worthless” friend, as the Polish Foreign Minister was quoted in a private context which is now embarrassingly public.

If not USD, then most likely EUR (just on quantity of supply), or any of the other currencies in the table above.

My conviction on the EUR vs rest of the world carry trades remain into the ECB meeting tomorrow evening.

As for the EURUSD, the logic of taper vs negative rates is pretty infallible. Yet with the market so overwhelmingly convinced, along with myself, and the fact that we could up against national reserves suggests that my 1.34 target for EURUSD which I mentioned previously is probably the best case scenario in the near term.