What happens when the U.S. Dollar AND Rates Rise?

While the rest of the world is talking about new all-time highs in the stock market, there’s another rally that deserves attention, the U.S. Dollar Index. Over the past six months, the U.S. Dollar Index is up 10.42% — a substantial move for the world’s reserve currency.

u-s-dollar-2016-performance(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz 

Traditionally, a rally in the Dollar Index has proven to be very beneficial for Managed Futures. That’s because it typically means the other currency markets are also moving with the same sort of depth. Here’s a 6 month look at the performance of the U.S. Dollar compared to the other foreign currencies that the Dollar index is tracked against.

6 Month Performance of Financial Markets 2016

Part of the reason managed futures tends to do well when the US Dollar is trending, is because the U.S. Dollar index impacts almost all commodity futures markets simply because those markets are priced in the dollar. That means, for example, a falling U.S. Dollar can translate to falling prices in dollar denominated futures markets (all else being equal).

But here’s what things gets interesting. There’s one dollar denominated market that doesn’t tend to fall when the dollar’s rising. We’ve seen a rallying dollar before. We’ve seen falling commodity prices before. But it’s harder to remember an extended period of time we’ve seen both a rising dollar AND falling bond prices (yields rising). Mainly because there haven’t been many recent periods where bond prices were falling (rates rising).

Here’s a quick and dirty look at the recent history of the Dollar and Bonds, as compared to managed futures.

Exposure

Which brings us to the environment many see persisting for quite a while here – Bonds falling (yields rising) and the U.S. Dollar trending up at the same time. The question on all those allocating to managed futures is – will this benefit or hurt Managed Futures performance? Turns out – no one really knows – because it’s never happened in a meaningful way the past 30 or so years.

The main unknown in this puzzle is how managed futures will perform in an extended rising rate environment. We’ve seen managed futures do well in past rate rising environments, but there’s also warranted debate over whether an extended down move in bonds will be as good for managed futures as the extended up move was.

Grab your popcorn… this is going to be fun.

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.