thoughts about price tomorrow, page-107

lekki, funny you mention the hedge funds. This week Fats reckons hedge funds are the ones causing the dollar to rise. (I thought it was the fed?) But anyway, that might change now if hedge funds go long again on commodities.

Here's a snippet from what Fats has to say this week on hedge funds....

The US dollar is all the rage. The Greenback’s super charged rally over the past few weeks has taken everyone by surprise and smashed the commodities and precious metals markets. Conventional wisdom says the US economy is now in better shape and with the Eurozone and Japanese economies slowing, the US dollar is a better currency to own than the euro or the yen.

While that is a perfectly acceptable explanation, our view is different. We believe the rise in the US dollar is a massive short covering rally. Those hedge funds that are still solvent and many other market participants (including ourselves) have been long commodities and short the dollar. This inflationary trade has been a very profitable one for a number of years.

But the credit crunch has cast a deflationary pall over all markets. This is leading to another round of liquidation and deleveraging. If you’re short dollars and long commodities, unwinding that trade means you have to buy back dollars to close out your short position. Hence the surge in demand for US dollars.

In addition, we are in a deflationary environment and cash is king. While the dollar rally may have more legs, we do not believe it is sustainable. As we point out in this week’s Market Comment, we believe it will only be a matter of time before central banks realise the magnitude of the deflationary threat, and start cutting interest rates.