What's up with UUP?

I've noticed some popularity with UUP lately amongst the retail crowd betting on a bounce in the dollar. UUP is the dollar bull fund which is a bullish bet on the US $. Anytime I see bottom picking by the retail crowd when the chart is showing no signs of a bottom and with fundamentals not favoring a bottom I become interested in betting the other way. A similar situation occured with UNG not too long ago.


With interest rates in the US at a ridiculous 0% along with huge fiscal spending and a huge current account deficit the headwinds against the dollar are quite strong. On a purchasing power parity basis the dollar is slightly above fair value and so you can't make the case the dollar is intrinically undervalued with limited downside. Typically you see currencies go to overvalued levels when fundamentals are good and then swing to undervalued when fundamentals stink. Rarely do they make long term bottoms at fairly valued.

My guess is that tomorrow Bernanke and the fed are going to assure markets that they have no intention of raising rates anytime soon even though they should be (at the very least to 1%) and that's probably going to send the dollar dropping and bonds selling off which would be a message to the fed that they better think again about this and acknowledge reality.

Lowering rates to 0% was an extreme measure due to the once in a lifetime collapse we saw. Now that CDS spreads, corporate bond yield spreads, TED spread and other measures of credit stress have collapsed well below pre-Lehman Bros. bankruptcy levels (which was the beginning of the great panic), interest rates shouldn't still be at 0%. It is so ridiculous. The Fed with all its knowledgeable and experienced members in the end are no less subject to the emotions and biases of the typical retail investor. They are still shell shocked from the collapse and they won't embrace any signs of a recovery until it's painfully clear that it has arrived without a doubt. They are usually very slow to react by cutting rates when a downturn arrives as well.

But out of all the central banks in the world the US is probably the quickest to act. The ECB is the worst. I remember last year at this time laughing at them when they were still talking about how they wanted to raise rates. It took about 5 whacks with a shovel over the head for them to finally acknowledge what was going on.

Bottom line: Look for the dollar to continue to fall shorter term and longer term. The current short term downtrend in the dollar is a bit long in the tooth and so you must beware of the snapback, but I still see it going lower because I don’t see any signs of a technical bottom at all. What I see is a well defined downtrend making lower lows and lower highs and the not so smart money trying to catch a bottom. As a caveat I must warn you that currencies are not my forte.