The greenback has been brutalized since November 21st and remains under attack. The reason I bring up the 21st is that is the day we had a low put in for the Dow and then we had a higher close for the day in an extremely large reversal.
Since the US dollar and Japanese yen had been appreciating while the US equities had sold off, we saw a big reversal that day in these currencies as well. November 22nd, the euro rallied over 350 pts as equities further rallied.
Simultaneously, we had credit spreads or risk indicators begin to stabilize and improve. The TED spread had seen a peak of 463 and was already at 215 on November 21st. 3mth LOIS (Libor-OIS) spread reached a peak on October 10th of 365 pts and was down to 172 on November 21st. Clearly, these risk spreads had already improved by the time we were putting in the lows for the equities and therefore one of the major causes/indicators underlying economic/equity weakness had changed.
Then came the US unemployment data on December 5th. The rate jumped to 6.7% and the NFP was much worse at 530k and the worst since December 1974. But a curious development occurred, the market dropped initially and then strongly rallied to finish up over 300 pts on the day. As a strategist and trader, I find these type of movements critical for understanding major market shifts. Essentially, the markets had priced in the abyss and had no where to go when we faced it. The only thing left was to recognize the dilemma and take profits. When you've gone to the edge and not jumped, the only thing left is to do is to carefully step back. This happened.
The last leg on this stool came from the massive de-leveraging that was occurring in the financial system. We know that the hedge fund community has been under duress from investors seeking redemptions. We know that money pulled out of this group leapt to the highest levels ever in October. We also know that Citibank was forced to re-lever by putting assets back on their balance sheet from an SIV. These all contributed to massive asset sales and further deterioration in equities and non-US dollar/Japanese yen currencies. Once the equity markets stabilized, then the pressure began to ease on this process. Also, hedge funds began to lock up investor money and not allow redemptions.
This also began a major reassessment of the US dollar. If there was no longer these major pressures and flows, then there was no longer a reason to be buying US dollars. One more thing contributing to the stabilization of the equity markets was the discussion coming out of the US government on what actions they would take to assist the economy. The two major points were a stimulus program and the Fed hinting about buying assets or quantitative easing. Subsequently, the Fed announced that they would buy $600 billion in assets. Then this week, the Fed cut rates 75 basis points and said they would use whatever tools necessary to stabilize the economy. We've now seen a rally in the Dow of 20% from the lows and a sell off of the US dollar of over 18% from its highs.
While the speed and size of the currency moves have been stunning, the daily volatility is numbing to the senses. The market is buying euros like a crack addict who's missed a fix for a month. Momentum is back with a vengeance and the scramble to find liquidity uglier than an intellectual discussion about politics on "The View."
This will not improve as we head into Xmas and New Year's. I highly, highly recommend putting together extreme strategies and leaving orders at extreme levels to put those strategies in action. If we've learned anything over the last 3 months, it's that there's not a bid too low or an offer too high. As an example of a strategy to the upside, I'd start leaving orders to sell near euros from 1.4700 and tier it up to 1.6000 in the euro to hedge exposures. Take advantage of the moves by having the game plan in place before the moves happen. In these times, plan, plan, plan should be the market mantra or you will miss the move.