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Dollar Bets


What are the two most well established trends in the markets? That the dollar is bearish and stocks are bullish.

Please note that I am not saying that stocks will go down as the dollar goes up. My yesterday post said that there is no relationship between stocks and the DXY.

But here's the interesting point. There are a lot, and I do mean a lot, of traders who are fully embracing this trend and doing so on a levered basis (particularly in the USD). Why is this important?

When a trend becomes obvious and when folks fully embrace it (particularly through leverage), the risks of that position become far larger than a normal risk distribution would suggest. In other words, second and third standard deviation events become far more "likely" than they otherwise would.

All this is a round-about way of saying that the risk is material that we witness some sort of trading book "blow-up" in the next few months from wrong-way bets in the USD. Whether that is a hedge fund or a broker dealer using their own capital to pad earnings is moot. The full embrace of obvious trends sets up all the necessary conditions for someone to blow themselves up trade-wise.

So don't be surprised if we see headlines to this effect in the next few months if the DXY turns up hard.
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