US Dollar is a buy

[wabrew]

Quote from Ivanovich:

Unfortunately, since there are many here who think this is a bottom, it probably won't be.

Usually I would agree -- "The market will do what it must do to make the majority wrong"

But this time I really wonder if the Fed can let the dollar go down anymore -- if they do, looks like long term interest rates have to go way up to offset the hit foreigners are taking while holding US paper that continues to depreciate vs. their currency.

Look at the following chart and tell me that if, two years ago, you converted a foreign currrency to Dollars to buy treasuries, what the total return would be if you sold and converted back at todays $ price.

http://stockcharts.com/h-sc/ui

Long term interest rates must go up !! This means there will be no cut this time. Stocks should fall sharply after they announce no cut.

 

[atticus]

The Fed follows the methamphetamine-school of monetary policy. Lower rates to increase foreign buying of US products and services... US products made in China but sold domestically.

 

[Ivanovich]

Wabrew, everything you say makes sense. But I used to have an old boss who said "Don't confuse the issue with facts."

What Ben and Co. should do is not what they will do. I will be stunned if there is a hold in rates, but I just don't think there will be. If they wanted to hold, they would have made some Fedspeak over the last few weeks about how the market is inappropriately pricing fed futures. They were silent.

To not cut will be a bomb on the market - which is the last bastion of the economy left standing at this point.

They won't do it. I wish they would. I pray and hope and implore them to. But they won't.

 

[detective]

Quote from nonlinear5:

I am not sure. What's the formula for interest rate parity? Maybe I am not doing it quite right, but here is what I figured:

1. Right after the last cut on Sep 18, the EUR.USD settled at around 1.3975

2. If the Fed cuts another 25bps, that would represent a 4.762% drop in discount rate (from 5.25% to 5%)

3. Assuming that everything else stays the same, shouldn't we expect the Euro to go up by the same percentage? That is, 1.3975 * 1.04762 = 1.4640

4. Right now EUR.USD is 1.4425. That is, there is another 215 pips to catch on the upside.

If anyone sees a flaw in this calculations, I'd love to know where it is.

Here is the flaw. You are looking at it as a decrease of .25% from 5.25% to 5%, but you have to look at it as a decrease of .25 from 1.0525 to 1.05.
Over a year, you are collecting 0.0025 less interest for every dollar. Or 25 cents per every 100 dollars. Actually, the currency that lowers rates should have a stronger currency according to interest rate parity which states that there is no arbitrage, or free lunch (like people think when they do the yen carry trade).

 

[wabrew]

Wrong chart - go to your chart service and key in $usd vs $ust yield to see my point

On stockcharts the symbols are $UST10Y and $USD

 

[number22]

The more fed cuts this time; the less it has left to cut in near future; so fed will either hold or just cut 25bp.

 

[flyingiguana]

buy gold, use usd's to keep you warm at night

 

[Enfinity]

We get a minimum of 25 bps... The next Fed meeting is in December and that's just way too late to affect a last ditch spending spree.

 

[Comanche]

Quote from flyingiguana:

buy gold, use usd's to keep you warm at night

Ahh, I would be a seller of gold if I am dollar bullish. Mind you that my call on the dollar is a short term trade, not the ultimate change of trend. way too early for that.

 

[Chood]

Quote from wabrew:

Usually I would agree -- "The market will do what it must do to make the majority wrong"

But this time I really wonder if the Fed can let the dollar go down anymore -- if they do, looks like long term interest rates have to go way up to offset the hit foreigners are taking while holding US paper that continues to depreciate vs. their currency.

Look at the following chart and tell me that if, two years ago, you converted a foreign currrency to Dollars to buy treasuries, what the total return would be if you sold and converted back at todays $ price.

http://stockcharts.com/h-sc/ui

Long term interest rates must go up !! This means there will be no cut this time. Stocks should fall sharply after they announce no cut.

Interesting points. Something's gotta give, right? Maybe the more obvious give would be the dollar, as in strengthening, rather than bond yields rising. As a store of value, dollar has sucked. Would it surprise that markets push the dollar lower than they should push it, all other factors in mind? No.

If anything is likely to revert in this pell mell global asset bloat, it'll be the dollar -- balloon-popping anti-dollars (think euro, cad, aussie) in the process.