Why a top currency strategist decided now is the time to sell the dollar

Published Thu, Oct 14 202110:15 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Top currency strategist Jens Nordvig said he has exited his long positions in the dollar and is looking for opportunities to short it, particularly against emerging market currencies. Nordvig, founder and CEO of Exante Data, is closely followed for his foreign exchange calls, and he says the dollar has gotten to a point at which it appears to have topped out. He said its next move could be decided by how Federal Reserve officials talk about inflation over the next couple of months. The dollar index, which represents the greenback against a basket of currencies, rose to a new 52-week high Tuesday, the day Nordvig decided to change his position. The dollar index has been trading slightly weaker since and was at 93.95 Thursday. The index was at a low of 91.94 on Sept. 3. "Now we're at one of those junctures where a lot of people are trading it. We have come far enough already," he said in a telephone interview. "I think we're going to have a more sideways trade. We had a big move in the last two months, and we're finding a new equilibrium essentially," he added. Nordvig said the dollar's move higher has been in part due to expectations the Fed would move sooner to hike rates than previously believed, with the market pricing the first part of a rate hike next July. He also said there was a move into the dollar as investors feared China's Evergrande would create contagion. The developer is wobbling under $300 billion in debt and is seeking to make asset sales to raise cash. Inflation's impact on the dollar Rising energy prices were also a factor behind the dollar's gain. "It used to be when oil prices go up, the dollar was in trouble, but since the U.S. is producing more of its own energy, that's changed," he said. "That correlation has totally flipped, so now actually when you have these energy spikes around the world, that tends to support the dollar." Nordvig said he is following inflation data closely, and Wednesday's consumer price index signaled some signs that inflation could be more permanent than the Fed has expected. "I think the next catalyst will be if the Fed starts to change the language on inflation," he said, adding it could take several more months of data. CPI rose 0.4% in September, more than expected as energy prices rose. The year-over-year gain was 5.4%, up from 5.3% in August. Nordvig noted that the make-up of CPI's gain has also changed, after an earlier surge in used car prices and fluctuations in air fares. "What's interesting is even if the used car prices and some of the other crazy stuff starts to normalize, if you look at all the categories in CPI and look at what's going on average, it's drifting up more and more," he said. "There are a lot of categories where it was up 0.4% on the month, a lot of categories," Nordvig added. "I think the inflation data is getting much more clean. The crazy categories are not that important anymore... If we get a couple more months that smell like this, the trend is more like 3%." The Fed has targeted 2% inflation but has said it will tolerate inflation in a range. Next year, its forecast is for core inflation of 2.3%. "I'm not saying 3% is hyper inflation but that's definitely above the Fed's definition of stability. When is the Fed going to respond to that?" he said. Plays against the dollar Nordvig said he is looking for near-term opportunities to short the dollar. "I don't have a very strong trading view. I was long the dollar up until [Tuesday]. I took it off especially against emerging markets," he said. "We've been long over the last month or so." Emerging markets are one place Nordvig is looking, since the return of tourism to some countries, particularly in Asia, should help their economies. "New Zealand is big, Thailand is huge, Mexico is coming back," he said. He said he would look at Malaysia and even Japan, since it gets a tourism boost. The Invesco DB U.S. Dollar Index Bullish Fund follows the dollar's moves and was also trading just off its 52-week high, while the Invesco DB U.S. Dollar Index Bearish Fund was up about 0.2% Thursday morning. The Invesco CurrencyShares Japanese Yen Trust represents a long yen trade against the dollar, while the WisdomTree Emerging Currency Strategy Fund consists of long positions in emerging markets' currencies against the dollar. Investors seeking to focus on specific emerging markets, like Thailand or Mexico can also look at broader market funds that trade equities. Mexican ETFs include iShares MSCI Mexico or Franklin FTSE Mexico ETF. There is also the iShares MSCI Thailand ETF and iShares MSCI Malaysia ETF.

U.S. dollars are counted at a bank in Westminster, Colorado.

Rick Wilking | Reuters

Top currency strategist Jens Nordvig said he has exited his long positions in the dollar and is looking for opportunities to short it, particularly against emerging market currencies.