Yves on the Dollar Carry Trade: Now In Trouble

Yves final post for the year (probably) picks up on the theme about whether a sea change has occurred in the Dollar. Yves comes firmly on the side of Oui.

The carry trade is now in trouble….

I don’t share the recent stock optimism as the tail is wagging the dog. The higher the stock index goes the greater the number of bulls and the greater the amount of decimated bears. Those burned bears will not be adding to the buy side at lower prices to cover shorts. See chart courtesy Market Harmonics). Good news about this will also turn out to be bad when the party is up.

The party by the way is almost up. The not-so-smart money of 2008 might be getting its mojo back. If the commercials are getting it right in the futures market then they might as well be calling the top of many markets.

One huge problem is that the bulk of the long side is now carried by speculators with cheap money. A simple rule of Wall Street where bulls die from their own weight may apply right here. Its all about mechanics rather than economics and becomes self-reinforcing. That’s been my point throughout 2007. Perhaps an early call but the right one nevertheless. We have come full circle once again. Leverage has been put back on as if nothing ever happened. I have underestimated the great desire of participants for suicidal tendencies. The cracks start to appear in select markets first. We have observed a number of those already. We did fire our first gold warning recently even though we have been long term bulls.

The second warning concerns the Japanese currency. I show a timing model based on expansion/contraction of the Japanese monetary aggregates. The recent stimulus from Tokyo is too small to make a large contribution to things. However it is relevant to us because money is already expanding and just might act to depreciate the yen at a faster rate.

You can see here another version of the same timing model showing the recent bump up in monetary aggregates. I have been a very long-term bull on the yen. If relative money expands in Japan while American money contracts then you have us bullish on the USD to come. 

I have studied the behavior of commercials in the futures market for a long time. They usually have a success rate of over 8/10. The year of 2008 was not so gracious to the not looking so smart anymore crowd. The commercials would appear to have gotten their mojo back. They are relatively short in big ways in too many markets. For that reason alone it bears watching as this is a significant development. 

The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here & now that the carry trade ends. 

 Yves Lamoureux, Investment Advisor, Blackmont Capital inc

The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc. or Yelnick. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CIFinancial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.

Comments

[Kailash]

/DX just jumped to 76.6 -- pretty relentless so far.

[graspthemarket]

I agree with your insightful analysis. I think another concept to support your ideas is that people are reducing their "risk". I think silver is good secondary proxy for the amount of "risk" people are willing to take. Over the past week, silver has seen a 9.5% decline--not because it won't be used, processed etc, in the physical way, but because people are exiting anything that had to do with the carry trade.

[Roger D.]

The rise of the dollar is "the cross" to the vampire ponzi market.

The perfect broadening top forming now within the larger 5 point reversal pattern is so rare in a major average(SPX) it must carry weight here.

Since the top at 1119 the market has declined in two sharp thrust downwards and rallied on each occasion in corrective fashion.

Tops take time and as each index breaks down completeing there initial wave 1 off their tops, they then complete wave 2 up. That is the stage we are now in. Are we finished now and ready to decline? The market will let us know soon enough. Because when wave 3 starts all averages will break with downward power and then fall to lower levels to validate this historic pattern on very large volume.

I expect after the 5 wave decline to validate the Broadening formation a short sharp rally to fail at 50 to 66 pct of the drop and then the gates of hell to open up on the downside.

Sound too bearish?? No not when you consider the many parabolic moves in the last 9 months.

My opinion is worth nothing, but compact tops formed with ending exhaustion extensions where the market squeezes the last dollar out of the bulls. It is what great bear markets are all about.

Cheers,
Roger

[joe]

European stock futures are not doing very well tonight - all down by 1.5% or more. This does not bode well for the DJIA tomorrow.

Joe

[Kailash]

The futures are gyrating wildly -- ES between 1096 and 1090, DX from 76 and up. The dollar is at a level seen in late September, when the S&P was at 1050. There is plenty of room for a real drawdown.

[Kailash]

A correction to my first post -- I was looking at the March DX futures; the December DX futures never rose above the noon reading of 76.355.

[Milen]

Hello, I read your site every day and like it.
I think the "wall of worry" is going to melt very soon as well.
According to Investors intelligence advisors sentiment, this week’s data included a new twelve year high for the advisors projecting a correction, along with lower readings for both the bulls and the bears. As things stand, the indexes continue to bet with 2009 highs. Pullbacks last week was brief and followed quickly by new buying. However, I have noted a narrowing of the participation.I have covered my point of view with few charts. Welcome and see more at:
http://oneelliottwavetrader.blogspot.com/

[Hockthefarm]

And we are going to fight it all with this:

http://blog.american.com/?p=7572

The approach is getting too simple:

1. Drop interest rates to zero.
2. Build houses.
3. Bail out bond holders with tax payer money.
4. Repeat.

That is our economic policy.

Hock