As it relates to our stance on the US Dollar, we started out 2009 with the theme “BREAKING THE BUCK” and ended the year with the “BOMBED OUT BUCK”, which focused on the bottoming-out process for the Dollar.  For 1Q10, we are now BULLISH on the dollar; hence we’ve named one of our major themes for this quarter, “BUCK BREAKOUT.” 


In the last weeks Keith has made it abundantly clear that while the inverse correlation between the SP500 and the US Dollar that we pick up on in February of 2009 (see our note to President Obama from 2/24/09 titled, “Breaking The Buck) held for the balance of much of the year with a high R-squared, correlations are not perpetual, especially when they become consensus. 


On January 4, 2010 we bought the US Dollar via the etf UUP in our model portfolio, a position anchored on our belief that despite Federal Reserve Ben Bernanke’s current strangle hold on interest rates, even “He Who Sees No Bubbles” (Bernanke) will have to signal an end to “extended and exceptionally” low interest rates because the economic forecast embedded in that view is simply unreasonable and unsustainable: US inflation continues to break out (the latest CPI reading was 1.8% Y/Y) and we expect this number to climb when December CPI is released on Friday.


Our bet is that raising rates should translate into the citizenry earning a higher rate of return on their savings and a flight by investors to the US Dollar as a safe haven. From a macro perspective, we think this aligns well with recent economic and political developments shaking global markets. The debt leverage and balance sheet issues associated with countries like Greece and Dubai continue to make headlines. As such issues persist (for example we continue to see a negative correlation with ME markets and the price of oil), we see the USD as attractive on a relative basis.


To substantiate our conviction on the Greenback, we shorted the Euro versus the USD via the etf FXE on 1/11/10. Additionally, our call that Chinese growth will slow in 1H10 (for more see our post on 1/13, Chinese Ox in a Box), should be bullish for the USD on the margin.


On the intermediate term TREND (3 months or more) we are bullish on the USD.  The TREND line for the Dollar Index is 76.24, which we’re comfortably above, with TAIL resistance up at 80.29. Since the beginning of December, the US Dollar Index is up 2.8%.


Matthew Hedrick




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