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Gaining Pain versus Paining Gains

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When DXY Index broke below 73 in April 2011, the hope for a revival just got thinner as the world
rejoiced a weak USD against majority of currencies. After all it helps in minimizing the pain inflicted by
rising commodity prices.

When most of us expected FED Chief Ben Bernanke to raise interest rates like the ECB which did so in
April 2011, the FED kept the rates unchanged but signaled the end of Bond buying program by June
2011.

The question is, how long will the falling dollar to rising commodity prices equation last? For how long
will we continue to rejoice that rising crude oil prices won’t affect us that severely as the impact is
reduced due to the strong local currency against the US Dollar. Don’t forget that the same is not true
for Americans who are losing their edge due to weakening Dollar. Is it right to envisage that the FED will
continue to be a mute spectator for an extended period of time, as the same is being preached or fed to
the media in the speeches of Mr. Bernanke. The charts of US10YR bond yields are suggesting an end of
the bull market in US Bonds which have been in place for past 3 decades now. The exit of US Bonds and
treasuries by PIMCO add fuel to the possibility that the good times in US Bonds may be coming to an
end for the good given the stature of the PIMCO chief Mr. Bill Gross.

Either the downgrade by S&P will be proved correct which means US Dollar would depreciate further
against other currencies or the Dollar will rise from the ashes.

Last year around the same time or to be very precise on June 2, 2010, DXY Index was at 89 and Europe
had fallen of the cliff, today the scenario is inverse. Though dollar has fallen off the cliff, Europe isn’t out
of the woods yet.

We would accede to the thought of a bearish dollar once its breaches below the low of 71 formed in
April 2008 and not before. As a player who believes in investing through the principle of contrarian
opinion, a long position in USD could be a good idea if DXY Index falls to 72 areas and stops can be
placed at just below 71. It won’t be a surprise to see the investment generating positive alpha in the
next 24 months time.

US Dollar Index (Monthly)


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Written by Dwaipayan Poddar

May 2, 2011 at 5:30 pm

Posted in Market Update

Tagged with , ,

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