Thursday, 14 March 2013

Assets Volatility and the US dollar - the end of the post Lehman era?

"The illiterate of the future will not be the person who cannot read. It will be the person who does not know how to learn." - Alvin Toffler 

While we recently touched on the dollar's appeal whenever there was a pullback in our conversation "Time for a pullback? Get some greenbacks!", many pundits are commenting on the radical change in the trend of the US dollar in recent weeks. It seems the US dollar is reacting as a "Risk-On" asset on the back of the recent raft of positive economic data coming from the United States, as well as benefiting from the "Quantitative race" led by the Bank of England and the Bank of Japan as well as the difficult economic situation in Europe. A few strategists are concluding that it marks the end of the the post-Lehman period and a return to a more normal macro environment.

The evolution of the Dollar Index (blue line), Volatility 1 year ATM (At the Money) for the S and P500 and the Eurostoxx 50 (red lines) since 2009 - source Bloomberg:
"The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trade partners, has climbed about 3.9 percent this year on signs of a broadening economic recovery, after declining 0.5 percent in 2012. Based on Bloomberg Correlation-Weighted Indexes, the dollar climbed 3.3 percent this year, making it the second-best performer after Sweden’s krona among 10 developed-market currencies. The Dollar Index rose for a fifth straight week through March 8, its longest rally since June, as American employers added more jobs last month than economists forecast, adding to signs the U.S. recovery is outpacing other developed nations." - source Bloomberg - Dollar Rally on U.S. Growth Endorsed by Jen as BNP Sees Reversal

In at a recent note from Bank of America Merrill Lynch entitled "Sweet spots and sellers's strikes", from the 14th of March, one can notice in the below graph displaying their GFSI, (being their global risk index integrating volatilities, credit, money markets, etc) falling towards 2007 lows while the DXY (Dollar index) is breaking away:

"Higher US Dollar & Lower Volatility = End of “New Normal” But without a doubt the biggest worry to investor positioning right now would be a reversal in the strong US housing and consumer story. Happily the latest US retail sales data allay such fears, and the leadership of the US in The Great Rotation remains ongoing. This is best seen by the decisive end to the post-Bear Stearns, deflationary relationship of strong dollar and higher volatility (Chart 3)" - source BAML

"It was just six years ago that the share price of Lehman Brothers reached an all time high. And less than five years after the investment bank declared the largest bankruptcy in US history, US stock indices are at new all-time highs. Thanks in great part to Ben Bernanke and other central bankers, Wall Street is once again riding high.
The big question is, can stocks hold or extend these highs? Our asset allocation is skewed toward a view that yes, equities can extend their gains over the course of 2013. But we also continue to think the probability and durability of that outcome would be improved by a “healthy pullback”." - source BAML

As far the DXY is concerned, it looks like since the beginning of the year, the Greenback has definitely staged a comeback!

"You can use all the quantitative data you can get, but you still have to distrust it and use your own intelligence and judgment." - Alvin Toffler

Stay tuned!

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