Saturday, July 18, 2009

Dollar And Yen Fall On Risk Seeking Trend

Recent news coming out indicates that investors are buying the indications from earnings reports, housing data and other tepid macro news releases - of course the resulting dollar and yen weakness is not ultimately surprising, no matter what our views on the "safe haven" theory.

The implication of a strong dollar/yen rebound in the event of another crash has been pretty well documented by various outlets but the more interesting story is any further downside risk to the dollar/yen. It's pretty clear that the somewhat linear relationship between say, EUR/USD and any number of bullish indicators (SPY, HG, the Big Mac index), until now is somewhat untenable going forward and is likely to at least slow down. If the bullish sentiment is ultimately right and we have returned to "normal", the ridiculously strong macro linkages we have been seeing until now are likely to break. However, if we see a bounce back south any gains posted can vaporize as quickly as they came.

On net, the risk/reward for further weakness in the dollar/yen is pretty unattractive going forward. We may eventually get back to the FX levels (1.6 EUR anyone?) that we know and love but for now, there are more attractive things to do than to short the dollar.

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