Long the US Dollar… And Loving it

While hardly scientific, we tend to have a knack for highlighting a certain market move or environment on the blog, and that market or environment quickly reversing course upon our piece hitting the airwaves. It’s the futures market equivalent of the old contrarian magazine indicator.

The latest example looks to be the Currency Markets, where our talk of record low volatility at the beginning of the summer has given way to some of the most volatile currency market trading in recent memory, with the U.S. Dollar Index up around 6% in the past three months {past performance is not necessarily indicative of futures results} during what Bespoke Investment called  “The Best Quarter for the Dollar in Four Years,

Bespoke Long USD(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Bespoke

If you do any currency trading or have actually exchanged currency in the past and are asking ‘the US Dollar versus what?’ – the US Dollar Index measures the dollar against six different currencies (and mainly the Euro), so a lot of what is happening here is reflective of the Dollar rallying against the Euro. But it’s not only the Euro that’s been selling off against the US Dollar. See if you can spot any downtrends [US Dollar up] in  the Canadian, Aussie, Yen, Pound, or Swiss Franc.

Currencies in One Chart(Disclaimer: Past performance is not necessarily indicative of future results)
Charts Courtesy: Finviz

Now, to be fair… we did ask rhetorically (and wishfully) in our beginning of summer piece whether this was the calm before the storm? So we can’t quite say this was a contrarian move that caught us, or systematic traders, off guard.  In fact, this ‘storm’ is just the sort of volatility expansion systematic futures folks like to see. It’s directional volatility, meaning the market has become more volatile (is moving more day to day) AND is moving in generally the same direction (in the case of the US Dollar, up).

For a while there in 2011 and 2012, we were asking for more volatility without being specific enough and got some non-directional volatility (aka whipsaws), which doesn’t really help anybody out.  You can see the US Dollar “break out” of its past range in the gray shaded area in the chart above (and for the more technically inclined – the 50 day moving average cross over the 200 day moving average), and that is just the sort of move systematic multi sector traders like global macro, trend following, and managed futures plan for. They suffer all of that flat to slightly down performance in exchange for being able to capture moves like this.

So it’s no coincidence that the ‘best quarter for the dollar in 4 years’ coincides with the best managed futures performance in 4 years.  This is just the sort of move that managed futures programs are designed to capture.  It’s a heck of a move in its own right, but it represents so much more than that, for it actually means that multiple currency markets are trending. And what’s more – a trending Dollar can actually affect non currency markets as well. Remember that all those Gold, Corn, Oil, Cotton and other commodities are priced in US Dollars – so all else being equal – a rising US Dollar means a falling commodity priced in US Dollars.

As short term proof – we can see the Newedge CTA Index up 1.48% so far in September after gaining 3.94% in August, to put YTD performance at up +5.57%. (it’s almost like someone said this was a generational low in managed futures around this time last year). But we’re interested in more than just the latest example, and wanted to see just how good a trending US Dollar has been for managed futures over time. Turns out a trending US Dollar is one of THE best environments around for managed futures, at about 3.5 times the monthly return of periods when the US Dollar isn’t trending. (we considered the Dollar trending if its 14 period ADX reading was increasing from one month to the next, looking back to 1989).

Average Trending Days(Disclaimer: Past performance is not necessarily indicative of future results)
Data: Barclayhedge CTA Index starting in 11/’85

So keep  cutting interest rates and doing buybacks ECB.  And keep the Abenomic experiment going, BoJ. And keep growing US Economy – because we want to keep riding this US Dollar up trend (aka Euro, Yen, Pound down trend), although we may have just jinxed it with our contrarian magazine article powers.

Write a Comment

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

logo