Trader Talk

A Bottom For The Dollar

We are seeing something today we haven't seen in a while: the dollar is strong, but commodities and commodity stocks are flat or up.

Since commodities are dollar denominated, strength in the dollar is normally negative. The fact that stocks are up today on dollar strength may be an indication that the market now realizes that a globally strengthening economy, with the U.S. leading, is a positive for BOTH the dollar and the stock market.

On one level, dollar strength is a bet on the U.S. economy and its ability to attract foreign investment.

Elsewhere, there are signs that the risk trade is back: the yen carry trade is reviving. Recall that the carry trade enabled traders to borrow money in yen at low interest rates (practically zero), then invest the money overseas.

There are clear signs that trade is reviving. For example, borrowing in Yen, and investing in Aussie stocks and bonds, has surged today, traders note.

That is a sign that the appetite for taking on more risk is increasing.

For example, the Euro-Yen Cross, the number of Yen per Euro, is at the highest level since October.

Careful, though, some traders think this could be a head fake. Skeptics note that the Fed has not yet raised rates, which would be the biggest help to the dollar. But the Fed funds rate is pricing a 100 percent chance that the Fed would be raising rates by next year.

Rhetorically, stock bulls have the upper hand. Remember the key bear argument: stocks will dip down in September and October when the market realizes it will see very little topline growth.

Bulls believe this group is reading the market wrong. They believe that any dip is a buying opportunity rather than time to take profits and get out. This is a big change from the sentiment six months ago.

If this is true, there is now a floor under the market.



Questions?  Comments?