The Diverging Dollar - December 9, 2014

Click Here for this Week's Full Letter - December 9, 2014



          Data out of the US continues to be rock solid. The economy added 321k jobs in November, exceeding even the most optimistic projections. The US dollar surged higher across the board and the DXY US Dollar index is at its highest level since the stock market bottomed in March 2009. The dollar has moved all this way without any material increase in Treasury yields. In essence, USD is tightening monetary policy for the Fed in the US, while stimulating abroad – except in China.

          As this story evolves, it’ll be interesting to see whether some of the weaker EM countries start to tighten monetary policy to slow capital outflows. We’ve already seen central banks in Russia, Nigeria and Brazil hike interest rates recently in order to protect their spiraling currencies. This could become a theme very quickly, making EM equities vulnerable to a downdraft (chart below).

          Can you imagine if the Fed actually follows through and hikes interest rates in 2015? I’ll be the first to admit that long US dollar positioning is excessive at the moment, but higher interest rates would be the icing on the cake for this USD move. Especially because the other G-4 economies, China, Japan and Europe, are simultaneously expanding their balance sheets.

         Speaking of Europe, the other big news from last week was that the ECB could proceed with sovereign QE by early 2015. Before everybody gets too excited about the possibility of more QE, I’d like to point out there is serious dissention among ECB officials. According to German press reports, a remarkable three out of six Executive Board members opposed Mario Draghi at the last meeting. The press conference seemed to confirm that the council is deeply divided both on assessing the current situation as well as measures to be taken.

          As I’ve already mentioned, there are countless reasons to be bullish USD going forward, but not against EUR in the short-term. The market has seemingly already priced in significant easing from a central bank that has disappointed the market before. The EU still has a solid current account surplus (2% of GDP), which should get an additional boost from the fall in oil. It’s a contrarian viewpoint that could be very profitable if it turns out to be correct.


          My portfolio was fairly quiet last week. Two new positions were added, but PnL was relatively flat across the board. I spent much of last week working on some new projects that I’m excited to tell you about soon. I’ve been fortunate to connect with some influential players on Wall St, and have started collaborating on some exciting ventures. In the meantime, I’m beginning to formulate the thesis for my December Investment Letter – if you’d like to start receiving these picks click here. It’s $8.25/month… a burrito from Chipotle costs more than that.

Today’s letter will cover several topics, including:

  • Anxious on Autos
  • Trending in China: Stocks
  • Liquidity Shortage
  • Chart of the Week


With that, I give you this week's letter:

December 9, 2014


As always, if you have any questions or comments or just want to vent, please send me an email at

Until next time, tread lightly out there,

Michael Lingenheld

Managing Editor – Cup & Handle Macro

Posted to Cup & Handle Macro Research on Dec 08, 2014 — 3:12 PM
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