After an epic fall in 2020-2021 due the coronavirus shock and the subsequent explosion in the Federal Reserve’s balance sheet to its current $8.2 trillion, the US dollar has made a counter cyclical move to 93 on its trade weighted index (DXY). The catalyst for this move are massive Japanese purchase of long duration US Treasury bonds, Chinese central bank intervention to arrest the rise of the renminbi, a fall in global metal and oil prices and a perceived hawkish tilt in FOMC smoke signals on monetary policy.
Yet I do not believe the US dollar is on the precipice of an imminent bull market. Au contraire, I believe the greenback is 3 to 5% overvalued and Planet Forex thus offers compelling strategic money making opportunities for nimble currency gnomes.
I believe risk sensitive, commodity currencies have been unjustly slammed on fears that the delta variant will hit global economic growth even while their domestic central banks have signaled a move away from extreme monetary accommodation and inflation appeasement. This leads me inexorably to the Norwegian kroner and the Canadian dollar, which meet the above criteria.
True, the prospect of a Fed taper precludes a buckaroo collapse but there is still money to be made in the carry trade with the petrocurrencies.
My macro views on the US Treasury/Canadian government bond spreads and the prospect for West Texas Intermediate crude oil leads me to believe that the loonie is a buy at 1.26 for a retest of its May high at 1.2320. I prefer to trade Norwegian kroner against its classic low yield nemesis currencies (the Yen, Swissie, Euro) but I am also getting tempted to buy the Nokki as its flirts with 8.90.
Matein Khalid is Chief Investment Officer at Asas Capital
