Joe Raedle
Everybody flee the U.S. dollar.
According to Hedgeye Risk Management, a U.S. firm that just put a short on the U.S. dollar, the next few months could be very rough for the currency and that could lead to big commodity inflation.
It's possible the dollar could fall as much as 10 per cent for the remainder of the year, said Daryl Jones, Hedgeye's macro analyst. If that happens look for a big rise in commodity prices, because the inverse correlation between the two is very high. If the greenback falls 10 per cent, oil could top $150 (U.S.) a barrel.
The next couple of months could be especially rough because there will be debates on raising the U.S. debt ceiling, trying to reach a budget compromise and the looming end of the main part of the quantitative easing program.
"The world is going to look at all those dates on the calendar and say sell the dollar," said Mr. Jones.
Hedgeye, by the firm's own count, has gone 19 for 19 on its recent U.S. dollar trading recommendations. It put its latest short on through the U.S. dollar index ETF .
"The risk is there's another big leg down," Mr. Jones said.
The firm also points to the inflation numbers coming out around the world, such as Tuesday's morning's hot consumer price index reading in Canada. Such numbers push rate expectations in countries like Canada higher, while the U.S. Federal Reserve is still staying at emergency lows. That interest rate dichotomy will continue to pressure the dollar, Mr. Jones said.
"Capital is going to fell the U.S. until you can get a rate of return that's comparable to the rest of the world."
What could the U.S. do? For starters, it could fix its budget problem. But that's a huge, intractable mess. The Fed, however, could withdraw quantitative easing and at least contemplate raising rates without killing the economic recovery, Mr. Jones said.
"The policies haven't aided the economy so to pull them awy wouldn't really hurt the economy," he said, adding that the U.S. isn't in bad enough shape to warrant such emergency measures any more.
"Yes, the U.S. economy is not great," he said, pointing to persistently high unemployment and a still falling housing market. "But everybody would agree, even us and we're on the bearish side, that we're not facing then next Great Depression."