FX FUNDAMENTAL ANALYSIS close out their short positions.
So, how do we play this upcoming Dollar consolidation in the markets? Well, we will stick with our larger multi-month topping process
yields
us to think about selling the Dollar longer term.
for
now. If we are right about both the US Dollar softening and US
drifting lower, then we think equities can rally a bit. But, we still think it’s a matter of selling rallies
rather
buying dips in this asset class. We will hold our high quality US bonds for now, and although we would expect credit spreads to tighten a little bit, we are just not that interested in owning
these
So, the message for now is that we may see a reversal of the trend apparent in some markets in recent weeks, but we don’t think this is
back. Given the ephemeral nature of liquidity in markets today, it is certainly possible that something happens in the weeks ahead to shatter the calm in markets that we think we see coming, and price volatility could pick up quite subs t a nt i a l ly. As such, we all need to remain alert, especially if our multi- month topping process is correct.
So, to wrap up, we have been of the view that the Dollar has been taking the role of
the Nobody
assets longer term as the spread is just too tight from an historical perspective, especially given the maturity of the economic cycle.
We would be cautious about actually selling the Dollar here other than for a very tactical trade. In fact, it would need a complete reversal from the Fed to a dovish path for
24 FX TRADER MAGAZINE July - September 2018 wants a strong currency
But nobody wants the Dollar to be too strong either
necessarily a strong reversal; more of a consolidation. There are times in markets when it is right to press your trade ideas and times when doing nothing is
to do. Boring as this may seem, we think that we may be moving into a summer lull in markets. When we discussed this potential internally, there was definitely some push
pied piper in recent weeks, and therefore a consol ida tion for the Dollar should help risk assets. But we are not advocating a big shift to risk
the right thing
on at all. Any rally in risk assets should prove relatively muted and should be used to raise defensive positions for those that have not yet done so and are worried about a potential multi-month top in markets.
Stewart Richardson
Chief Investment Officer RMG Wealth Management
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