Dollar Worries for Emerging Markets Trade

Good chart from Gary Morrow at “This Week on Wall Street”.

Click to enhance / enlarge


On Invesco’s website it’s noted that the top three foreign currency forwards for the UUP are:

  • Euro: 58%
  • Yen: 14%
  • Pound: 12%

So as the euro / dollar goes, so goes the UUP.

Summary / conclusion: The US dollar is in one of its longest stretches of bull runs per Bloomberg, which noted yesterday that the greenback is experiencing its 3rd longest bullish run in history. The Emerging Markets trade became popular early in 2018, so maybe this will take the bullish enthusiasm off the trade, but I still like EM’s and the EM trade over the next few years.

China’s recent tax cuts and their dealing with some of their trade policies will help too. China is still the 2nd largest EM and thus could counteract the strong dollar influence.

Client’s emerging markets weighting was lifted in Q4 ’18 as the EEM and VWO started to outperform the SP 500 at the end of October ’18, although both EM ETF’s have now underperformed in 2019. The three vehicles being used to play the trade are the EEM, VWO and the Oakmark International Fund. David Herro is an excellent manager although he had a tough 2018, but you have to buy his fund and the asset class when its out of favor.

Client allocations are roughly 5% – 10% EEM/VWO and then OAKIX is used to get the weighting to the 10% – 15% range.

The US dollar has been in a trading range for a few years. The UUP is still below its late 2016 high although both the Dollar index and the UUP are close to all-time-highs.

Being patient for now. The race to the bottom for the completely spineless ECB drove dollar strength today.

I would not like to see the DXY or Dollar index make an all-time-high.

Thanks for reading.

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