Another reason for caution? The euro carry trade may be unwinding. Specifically, leveraged money managers have been borrowing the “sure-to-depreciate” euro to invest in “sure-to-appreciate” U.S. dollar-denominated assets (e.g., U.S. stocks, U.S. bonds, the U.S. dollar, etc.). However, CurrencyShares Euro Trust (FXE) has climbed above a 50-day moving average and has stayed above its 50-day for the first time in twelve months. This may be a sign that traders are being forced to liquidate dollar-denominated assets to pay back their euro loans.
Granted, U.S. multinational corporations might actually benefit from a depreciating buck. Exports might swell; revenue generated in foreign currencies might improve profitability prospects. Regrettably, U.S. stocks are already overvalued by traditional valuation metrics. It follows that waning enthusiasm for U.S. dollar-denominated assets may not be temporary. Rather, U.S. stocks may require a health-restoring correction coupled with comments by voting members of the Fed indicating the unlikelihood of any meaningful hike in borrowing costs.
Raising one’s allocation to cash may be a regal alternative while waiting for brighter opportunities out on the horizon. That said, someone who wishes to hedge dollar risk today may wish to investigate the much-maligned commodity space. Since the mid-March highs in the dollar as well as the broader equity market, SPDR Gold Trust (GLD) and the United States Oil Fund (USO) have gained ground. Similarly, Greenhaven Continuous Commodity (GCC) has reclaimed a near-term uptrend with its recent move above a 50-day moving average.
