The Big Dollar Swoon?

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There were so many false starts last year for those of us who were looking for the big dollar to roll over that it’s natural to be a bit gun-shy here. But the charts are unambiguous: It’s happening right now, and the odds that it sticks this time are as good as they’ve been in a long while.

Obviously, buckets matter. The funding currency bucket will behave differently from the risk/EM currency bucket. And the antipodean bucket will behave a little differently from the other two. But all of them look good against the dollar right now.

In poker, there’s a term called “pot odds”. It means that the even if you’re not confident that your cards are strong enough to win, you play out the hand because the return on your marginal bet to stay in is potentially so large. The analogy here is that there are certain setups that–whether you want to or not, whether you’re feeling it or not–your discipline says you just have to go for. The patterns on the charts posted below tell us that if you’ve been looking for a short dollar run, you have to be in now. At a minimum, you certainly can’t be long dollars.

This does not mean you go crazy with size or that you abandon your stops. In fact, when you have been faked out a number of time and are gun-shy, it is best to undersize the positions until you build up more mental capital (and pray the market gives you another decent entry point after you have). But you have to be in.

The EM charts look the best. USDTRY, USDBRL, USDZAR look great. And USDTRY and USDBRL look even better on the five year charts. The BBDXY has rolled over too, and the five year real yield have finally completed its drop, weak-ass bounce, then drop again pattern. (USDMXN looks good too, but it has already had a big run and positioning is not as favorable.)

Obviously, for the EM currency bucket to work, risk appetite will almost for sure need to comply. This is less true for the funding currencies and precious metals, which have looked good for a couple of weeks now.

Roll tape:

USDBRL on the one year
USDBRL on the five year
USDTRY on the one year
USDTRY on the five year
USDZAR on the one year
BBDXY on the one year
BBDXY on the five year
US five year TIPS real yield on the five year

Good luck.

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