Long the US Dollar… And Loving It by Attain Capital

While hardly scientific, we tend to have a knack for highlighting a certain market move or environment on the blog, and that market or environment quickly reversing course upon our piece hitting the airwaves. It’s the futures market equivalent of the old contrarian magazine indicator.

The latest example looks to be the Currency Markets, where our talk of record low volatility at the beginning of the summer has given way to some of the most volatile currency market trading in recent memory, with the U.S. Dollar Index up around 6% in the past three months {past performance is not necessarily indicative of futures results} during what Bespoke Investment called  “The Best Quarter for the Dollar in Four Years,

US Dollar

(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Bespoke

If you do any currency trading or have actually exchanged currency in the past and are asking ‘the US Dollar versus what?’ – the US Dollar Index measures the dollar against six different currencies (and mainly the Euro), so a lot of what is happening here is reflective of the Dollar rallying against the Euro. But it’s not only the Euro that’s been selling off against the US Dollar. See if you can spot any downtrends [US Dollar up] in  the Canadian, Aussie, Yen, Pound, or Swiss Franc.

US Dollar

(Disclaimer: Past performance is not necessarily indicative of future results)
Charts Courtesy: Finviz

Now, to be fair… we did ask rhetorically (and wishfully) in our beginning of summer piece whether this was the calm before the storm? So we can’t quite say this was a contrarian move that caught us, or systematic traders, off guard.  In fact, this ‘storm’ is just the sort of volatility expansion systematic futures folks like to see. It’s directional volatility, meaning the market has become more volatile (is moving more day to day) AND is moving in generally the same direction (in the case of the US Dollar, up).

For a while there in 2011 and 2012, we were asking for more volatility without being specific enough and got some non-directional volatility (aka whipsaws), which doesn’t really help anybody out.  You can see the US Dollar “break out” of its past range in the gray shaded area in the chart above (and for the more technically inclined – the 50 day moving average cross over the 200 day moving average), and that is just the sort of move systematic multi sector traders like global macro, trend following, and managed futures plan for. They suffer all of that flat to slightly down performance in exchange for being able to capture moves like this.

So it’s no coincidence that the ‘best quarter for the dollar in 4 years’ coincides with the best managed futures performance in 4 years.  This is just the sort of move that managed futures programs are designed to capture.  It’s a heck of a move in its own right, but it represents so much more than that, for it actually means that multiple currency markets are trending. And what’s more – a trending Dollar can actually affect non currency markets as well. Remember that all those Gold, Corn, Oil, Cotton and other commodities are priced in US Dollars – so all else being equal – a rising US Dollar means a falling commodity priced in US Dollars.

As short term proof – we can see the Newedge CTA Index up 1.48% so far in September after gaining 3.94% in August, to put YTD performance at up +5.57%. (it’s almost like someone said this was a generational low in managed futures around this time last year). But we’re interested in more than just the latest example, and wanted to see just how good a trending US Dollar has been for managed futures over time. Turns out a trending US Dollar is one of THE best environments around for managed futures, at about 3.5 times the monthly return of periods when the US Dollar isn’t trending. (we considered the Dollar trending if its 14 period ADX reading was increasing from one month to the next, looking back to 1989).

US Dollar

(Disclaimer: Past performance is not necessarily indicative of future results)
Data: Barclayhedge CTA Index starting in 11/’85

So keep  cutting interest rates and doing buybacks ECB.  And keep the Abenomic experiment going, BoJ. And keep growing US Economy – because we want to keep riding this US Dollar up trend (aka Euro, Yen, Pound down trend), although we may have just jinxed it with our contrarian magazine article powers.

“The Managed Futures Blog is a compilation of thoughts, research, attempts at humor, and more from the team at Attain Capital Management (“Attain”). Attain pairs high net worth individuals, RIA’s, and institutional investors with alternative investments in commodities, managed futures, and global macro strategies through privately offered funds and managed accounts. Click here to sign up for their insight and analysis.”