"King Dollar" For Now...

As written in one of my previous posts, I thought the USD would break the symmetrical triangle and head lower, but instead it has managed to stay within it and moved up. This is why I have turned very bullish on the dollar in the short term, and I believe the rally still has legs. The greenback has been so strong that it has even gained against the Japanese yen. In the meantime, sovereign debt, especially on the longer end, has continued to sell off as worries regarding the European debt crisis intensified. Ireland officially received its bailout package today, yet the euro weakened once again. This is classic "good news, bad price action!" In terms of equities, the Nikkei, led by higher USD/JPY, and the S&P, benefitting from a stronger dollar, have outperformed stocks in Europe and emerging markets.

What can you expect in the short term? Unfortunately, I believe the trend should continue as the "King Dollar" is poised to strengthen further against its counterparts while equities in Japan and the U.S. will continue to outperform as risk aversion and carry trade reversal continue to unfold. Therefore, I am buying the dollar and selling everything else. As a pair trade, I recommend selling short Europe and emerging markets while buying Japan and U.S. as hedges.

Things Have Been Moving Counter-Trend Lately, What Should You Do?

Euro has tanked, dollar has gone up, yen has weakened, stocks have corrected while long-term bonds have continued to fall! What in the world is going on? On the currencies front, I am currently neutral on both the euro and the dollar while feeling slightly bearish in regards to the yen. I remain a bull in stocks and short-term bonds while having a negative bias towards long-term bonds. Why? While the EUR/USD cross has been under severe duress lately, the bottom of the rising channel has held up. On the other hand, the dollar index was able to sneak back into the symmetrical triangle after briefly penetrating it following the announcement of the larger-than-expected QE2 program. I currently have no positions in either the euro or the dollar as I am staying on the sidelines waiting for more clarity. However, the yen seems to have found a short-term bottom as all major yen pairs have moved up recently. For instance, USD/JPY has risen to a 5-week high after today's rally before stalling at the 50-day MA.

Fundamentally, while the PIIGS remain a risk to the ongoing global economic recovery, I do think there is enough liquidity in the markets to sustain the rally in most assets since central banks globally have pumped trillions of dollars in their respective financial systems. In the U.S., economic data has been surprising on the upside and confirming that while the recovery has been slow, double-dip is unlikely. Assets in emerging markets will continue to do well due to the size of the QE2 program. However, risk in the LT bonds has increased given higher inflation expectations as a result of massive stimuli.

Just Quickly Reiterating What I Wrote About Chinese Stocks 6 Months Ago

Since July 5th, Chinese stocks are up ~30%!

Date: Wed, 19 May 2010 19:13:38 -0400

few reasons why im bullish....

M2 money growth of 25% last year means inflation is coming, if not HYPER inflation

now let's see where they can put their money

real estate = negative, because they have already OVERdone it
deposits = negative, real interest rate will be negative given record low interest rates
gold = slightly positive, but chinese are already largest owner of gold, so you can argue this is sorta OVERowned as well
stocks = positive since inflation is good for stocks in general, some money out of real estate will flow into consumer industry, plus chinese love to pick bottom, and like it or not, the stock market is about 60% below peak in '07

anyways i was bored, but i do expect chinese stocks to be much higher from current levels by yearend