Apparently This Time Is Different
I like the US Dollar generally and believe that the move that started this year probably has a lot more room to run. That said, I am skeptical that the Buck can continue its advance at the current rate. Aggregate positioning in USD on the IMM recently reached its highest levels ever.
While this data only captures a sliver of the market, it does do a good job of capturing the conviction at the moment that the USD can only go up. All too predictably I keep reading reasons why these extremes don’t matter this time. I don’t buy it. Historically in the currency markets when conviction is so high it is precisely the time to start looking to get out or go the other way. A flush out of some sort seems likely to me and probably sooner than later. USD/JPY looks especially vulnerable in this regard as sentiment recently touched all-time high levels of optimism. A contrarian’s dream. I suspect USD/JPY will surprise most over first part of the year by at least consolidating and probably weakening into the summer. Around the 3rd quarter USD/JPY should be a buy again.
From an FX perspective we like the Greenback generally in such an environment, but especially so against Asian EM currencies given their geared link to the current global credit cycle. In the FXCM universe of exchange rates, USD/SGD looks especially attractive even with the involvement of the Singapore Monetary Authority.
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