A Rareview Macro Strategy View: US Dollar and China

Below excerpt from July 25 edition of “Sight Beyond Sight” is courtesy of Rareview Macro LLC

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

Overnight Commentary Strongly Centered on US Dollar, China, and NASDAQ

  • US Dollar
  • China – Operation Fox Hunt

US Dollar

In the July 16th edition of Sight Beyond Sight we doubled the long US Dollar index exposure in the model portfolio and highlighted a number of catalysts for further US Dollar strength. As a reminder, the current position is long 500 U.S. Dollar Index Futures (Symbol: DXU4) for an average price of 80.4425 (original 80.28 on July 3rd + addition 80.605 on July 16th). We also hold a position of long Dollar/Swiss (USD/CHF) which helps better balance the European exposure in the basket. Collectively, if prices hold the long US Dollar position will generate about ~50 basis points of positive PnL this week.

We do not take victory laps in this newsletter as there are plenty of misses as well. We highlight this to emphasize that a long Dollar position can provide strategies that are lagging in performance with an opportunity to claw back. Additionally, this is an asset class that can absorb large inflows and no one is long in any material way currently.

Here are three most current US Dollar talking points – Structural, Technical and Data.

The consensus amongst paid forecasters with respect to the European structural backdrop continues to build. Morgan Stanley yesterday joined Nomura’s #1 ranked foreign exchange strategy team in holding this view. MS said “There were three main EUR-supportive flows that drove EUR/USD beyond what interest-rate differentials would suggest over the past two years: (1) foreign buying of peripheral bonds, (2) foreign buying of equities, and (3) official sector reserve diversification into EUR. We think all three flows are slowing and will continue to do so over coming months, leading EUR to trade more in line with macro fundamentals.”

A handful of other houses have also commented on the official sector reserves diversification (i.e. point #3 above) into the Euro. Specifically, they are highlighting that China is diversifying less into the Euro and that is significant.

From a technical standpoint one of the factors we identified early as a catalyst was the formation of the “Golden Cross” where the 50-day crosses up and through the 200-day moving average. This week, professionals are focused on two other important technical observations……

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