- China’s crackdown on the real estate market may trigger an estimated 400 billion yuan ($58.6 billion) to flow out of property and into equities, according to the nation’s largest brokerage. (Bloomberg)
- Brazilian policy makers will take “vigorous action” against inflation to ensure that Latin America’s biggest economy doesn’t overheat, central bank President Henrique Meirelles said. (Bloomberg)
- Greek bonds tumbled, pushing yields to the highest since at least 1998, on speculation Germany may refuse to guarantee an early release of bailout funds. (Bloomberg)
Quotable – On Greek debt
“Some people see things that are and ask, Why? Some people dream of things that never were and ask, Why not? Some people have to go to work and don’t have time for all that.”
FX Trading – If our $ call is right, correlations may change big time!
Our longer term dollar call for a while now is simply this: The US dollar entered a multi-year bull market after bottoming in March 2008. If that proves correct, it is likely we will witness some major changes in correlations that seemed to be such layups during the US dollar 7-year bear market phase. Many of us just assume the recent past will be projected into the future. But maybe the less recent past is a better guidepost.
Three major asset class correlation changes versus the buck, which we are already starting to see, include stocks, oil, and gold. Yet, we still see traders and analysts relying on the increasingly flimsy excuse of dollar direction to justify a particular move up and down in oil prices (ditto gold, less so for stocks). But, I guess that is to be expected. They likely wouldn’t be invited back to any party by saying: “You know, I have no clue why oil prices went down today.”
We happen to think the 1992-2002 (closing high in July 2001) bull market move in the US dollar index is a good roadmap for the dollar move this time around. Already we have seen a similar pattern of initial rally off the bottom in the dollar index, then a nasty retracement fooling many into believing the initial move was only a bounce in an ongoing bear market; markets have a way of doing things like that. That happened during the last bull move as you can see in the chart below.
The dollar index, the red line, rallied sharply into 1994, then tanked, retracing about 90% of the initial move. Then there was a rocket ride for the next seven years. The implications, if this period is analogous, which at the moment we think is:
- Dollar rally for many years
- Stocks rally alongside
- Oil prices move higher in conjunction
- Gold falls
Granted, it is unlikely to be this easy; it never is in the real world in real time, only in hindsight land. But, we think a big correlation change is upon us.