Dollar Carry Trade Remains in Vogue

Today’s price action in the markets is very telling. What is it telling us? The dollar carry trade remains in vogue and technicals continue to dominate overall flows much more than fundamentals. Let’s navigate.

Recall that the weakness in the U.S. dollar has facilitated a large number of hedge funds, market speculators, and to a less extent investors to borrow dollars and buy a variety of risk based assets. What assets? Equities, a wide array of bonds, a basket of commodities, primarily gold. How are these sectors performing?

After an initial spike of 1-1.5% across the equity markets, these major market averages have retraced and are now effectively unchanged to slightly better on the day. Is that a sign of investors not believing in the details of the employment report? No, anything but. In fact, I believe the equity performance today is quite strong given the fact that the dollar has increased by 1.6%.

Bonds have traded in a very narrow range. Interest rates moved higher by approximately 12 basis points (.12%) and have sat there almost all day. The question that now comes back front and center is when the Fed will decide to raise rates. While most analysts had written off the possibility of an increase in rates prior to 2011, now analysts are projecting that the Fed may raise rates by mid-2010.

If rates do rise here, what does that do for our greenback? It will do better and it is doing just that today. As I referenced the U.S. Dollar Index has increased by 1.6%.

As the dollar improves, money comes out of those havens to which it ran to protect against a further dollar decline. What havens are these? Gold and commodities.

Gold on the day is down approximately 6%. Be mindful that the shiny yellow stuff was up over 30% on the year through the month of November.

In regard to commodities, the DJ-UBS Commodity Index is down 1% on the day.

What does all this mean? Lots of questions remain, including:

1. Will the cheap source of funding from a 0% Fed Funds rate continue?  How long?

2. Will the Fed extend its quantitative easing program via its purchases of mortgage-backed securities beyond Q1 2010? How would the market react if it does not?

3. What happens to the train wreck that still encompasses our commercial real estate markets?

4. Will retail sales confirm the labor statistics reported today?

5. Will the markets begin to trade based on fundamentals instead of the technical support provided by the Fed and Treasury? Can Ben and Tim carefully let the air out of the bubble created over the last 8 months?

Lot of questions yet to be answered but for now, I still have my eyes most closely fixated on the greenback. As the greenback goes one way, I still believe the equity markets, bond markets, and commodities will go the other.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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