A Tale of Two Carry Trades...
by Jes Black
October 3/04
The dollar managed to rally back to the underside of key trendline support today at 88.50, negating for the time being our short term bearish outlook.
Recall that last month we forecast a swift dollar rally on the back of rising yields. This view had put us on the correct side of each trend change over the past eight months but we must acknowledge that the dollar does not have a significant short position built up against it this time that would fuel a short covering rally.
On the other hand, speculative long positions in the 30-year bond reached a six year high two weeks ago, while speculative long positions in the five year note remain near record highs set just six weeks. In addition, the most recent commitment of trader’s data shows speculative long positions in the 10-year note reached a 3 year high last week.
The record long positioning built up in August and September has fueled the sharp decline in bonds over the past week, indicating that the “carry trade” we have been warning about is finally coming unwound.
Normally, this is a bullish sign for the dollar because in the recent
past traders have built up a sizeable short position in the dollar concurrent
with their bond carry trade. Then, when yields rose, a forced liquidation
resulted.
Since the dollar index topped at 92 in May, we have not seen a significant
build up of “carry trade-like” positions similar to that seen
in the bond market. Perhaps this is why the dollar has fared so well over
the past four months. In fact, this is the first time in three years the
dollar has outperformed the 10-year yield.
Nevertheless, if US yields fail or struggle to make it over key resistance
at 4.3% this week, then the US dollar may not be able to hold the 88 level.
In turn, we could see a further decline targeting the June low of 87 followed
by the February low of 84.54. Our recommended dollar short position is
against the Australian dollar.
Jes Black, hedge fund manager at Black Flag Capital Partners, specializes
in foreign exchange and global macro trends. Prior to organizing the fund
he helped MG Financial Group launch Forexnews.com. Afterwards he went
on to found FX Money Trends, a research firm catering to professional
traders.
Mr. Black holds a degree in economics from the University of Kansas and
an MBA from the ESC in France. His market commentary is often featured
in the Wall Street Journal, Financial Times and Reuters. He has also written
numerous strategy pieces for Futures magazine. To find out more about
the fund’s research letter visit www.fxmoneytrends.com. Qualified
prospective investors can find out more about Black Flag Capital Partners
by e-mailing info@blackflagfund.com
Jes Black
FX Money Trends, LLC
One Henderson Street
Hoboken, NJ 07030
646.229.5401 Tel
201.222.5577 Fax
www.fxmoneytrends.com
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