22 January 2010

Long on the Dollar

Here are a couple of charts of UUP, the long USD ETF, marked up to reflect the call options I hold, and where prices of UUP could move to in the next couple of months...if the market aligns just so:

Arbitrary lines on charts shouldn't be enough to take a position, so here's a sampling of pro-dollar articles and analyses I've collected over the past month:

Mish bullet-pointed out the pro-$ arguments:

US Dollar Positives

* Japan demographics as noted above
* Greece bailout
* Spain property bubble
* Baltic state currency collapse
* Savings rate in US headed north
* Extreme bearish US dollar sentiment
* Pending implosion in the UK
* Canadian property bubble bursting
* Australian property bubble bursting
* Hard landing in China, collapse of the RMB

Marc Faber called for a 5%-10% rise in the dollar against the Euro in late December:

“Sentiment on the U.S. dollar was really extremely negative over the last three months,” Hong Kong-based Faber said. “The other currencies are not much better. The dollar will appreciate against the euro by another 5 to 10 percent, and later on we’ll have to see, but that would be a near-term target.”

Morgan Stanley believes
the dollar will rise:

As things stand, we are forecasting a trade-weighted rise in the US dollar of 8.0% against the major currencies while it remains roughly unchanged on a broad trade-weighted basis in 2010 as we expect many EM currencies to outperform.

Daniel Gross seems to have mixed up and reversed his thinking
, since the dollar has been rubbish during the recent green shoots bull market rally:

If you believe the U.S. economy will scrape along bottom for the next few years and that inflation will spike, then prolonged dollar weakness seems likely. But if you believe the economic recovery is picking up steam; that the economy may grow at a rate between 3 percent and 4 percent in 2010 (as of Friday, Macroeconomic Advisers said fourth-quarter GDP was tracking at a 5.4 percent annual rate); that the United States will grow more rapidly than the United Kingdom, the Eurozone, and Japan; and that inflation, which has risen just 1.8 percent in the past 12 months, will remain under control, then the greenback's prospects look more rosy.

John Maudlin thinks the dollar is the least sucky currency right now:

The dollar may rise against the major currencies during the first part of the year. As I wrote weeks ago, world trade is slowly picking up. While that growth has not been very visible in the US, it is becoming evident among the emerging-market countries that were not overly leveraged when the crisis began. And trade is still in dollars.

Businesses sold their dollars during the crisis, as they did not need them for trade. But now, with trade picking up, they once again have to buy dollars. That is one reason for the recent bull market in dollars. The other is that the markets are massively short the dollar. When everyone is on the same side of a trade, that trade may have run its course, at least for a while. And that seems to be the case recently for the dollar.