• GB Davis

Security in Focus: USDollar Proxy ($UUP)

In the last week, Nordea and Hedgeye have gone against the USD; which being two firms we have an incredible amount of respect for, gave us pause for caution on our own thinking and thesis.

Nordea's research note is penned here: https://e-markets.nordea.com/#!/article/48587/fx-weekly-in-eur-we-trust

"The green shoot narrative is therefore probably also supportive of a bounce in EUR/USD, but so far, we have only opted to highlight that scenario, but refrained from entering long EUR/USD. The smart way to play a long EUR/USD position is maybe via short CAD/NOK (those positions are highly correlated historically), as a short CAD/NOK works roughly as a long EUR/USD position, but with a shield from the expensive carry (of shorting USD versus EUR). At some point one though must put the money where the mouth is and hence we go long EUR/USD. Target @ 1.1650. Consider a stop/loss @ 1.1187."

Our review has perhaps a technical bounce in EUR/USD, being range bound, with the ECB (1) growing more dovish; and (2) more dovish than the Fed; with the Fed acting last (as a CB), and most likely won't be acting first. With any re-acceleration in China, not self-evident, or showing EU correlation - yet - but agree, would be important to look closer at EM and developed EU - if such unfolds, which the green shots are there.

We believe that the earliest that the USD could top (in terms of some FX cross-pairs) would be September when QT is halted - however, if RoW is still dovish, and prospects look even handed for the Fed to cut or hike - or roll down more QE at prevailing Fed Funds rates - then we evaluate such positions at such time vis-a-vis RoW (i.e. it is too early for us to call anything here other than a technical bounce, where there is evident technical downside pressure to the USD, but appears fairly priced and range bound to us in Euro terms). #NotInvestmentAdvice

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