Is the Dollar Carry Trade Coming to an End?

We are seeing huge sell-offs in many asset classes today. It may be end-of-year profit-taking as traders head for their holiday vacations, or it may spell the end of the Dollar carry trade.

from Bloomberg:
Dec. 17 (Bloomberg) -- The dollar rose to the highest level against the euro in three months as declines in stocks stoked demand for the currency as a refuge amid concern European nations may struggle to pay their debts.
The Dollar Index, which the ICE futures exchange uses to track the greenback versus six major currencies, rose the most in two weeks as traders closed out bets against the dollar a day after the Federal Reserve said economic conditions had improved. The pound fell to a two-month low against the dollar after data showed U.K. retail sales unexpectedly dropped in November.
“It’s the first time in a year we look at the dollar with the potential to rise over an extended period,” said Steven Englander, chief U.S. currency strategist in New York at Barclays Plc, in a Bloomberg Television interview. “The same safe haven characteristics that helped the dollar in 2008, and hurt it from March through November, is helping it again. The gap in U.S. growth relative to Europe is beginning to widen.”


Ag Commodities

Dollar

Treasuries - after days of rising rates, this rise doesn't support end of carry trade idea

Stocks - tanking

Mixed-Up Soy Complex

What an odd day for soybean traders! The complex was extremely mixed, with soybean oil sharply higher, soybean meal solidly lower, and soybeans mostly flat!

Soybeans -- marginally flat to lower
Soybean Meal -- sharply lower
Soybean Oil -- sharply higher

Corn, Bean Oil Go Ballistic

Even on weak stock market performance, corn and soybean oil have rocketed higher. Interestingly, soybeans and soybean meal have sagged. Wheat is also higher. Interesting mixed grain market today!

Grains Grope for Bottom

Along with many other financial markets, the grains have been in a downtrend for the past few days. Based upon today's trading, it doesn't appear that the bottom is near. This chart for soybean oil is symbolic for all the grains, including corn, the entire soybean complex, oats, rough rice, and wheat.

From Bryce Knorr of Farm Futures:

Traders return from a long weekend to confront much of the same bearishness they faced last week. Economic pressure around the globe continues to weigh on the grain market, with better weather in South America adding to the negative tone.

Trading Soybeans With Smaller Margins, Limited Risk

A few traders have indicated to me that since soybeans are the most volatile of the grains, the potential risks and losses are too much for their risk profile. However, I've noticed that soybean oil and soybean meal can also be traded with a smaller margin and more limited risk. Both futures have margin requirements that are about half that of the soybean contract. The down side is that both also tend to have less liquidity than the intact bean.

I've also noticed another interesting phenomenon. I've noticed that when I intend to sell, it is most profitable to sell soybean oil. When I wish to buy, on the other hand, it is best to buy soybean meal. Meal tends to move higher, faster than the oil. Oil tends to move lower at a faster pace than the meal. Shown here are the daily charts for both. Also, the chart for soybean meal tends to more closely match that of the chart for the soybean contract.

Soybean Meal -- Moves Higher at a Faster Pace

Soybean Oil -- Moves Lower at a Faster Pace

Soybean Meal Still Looks Good

Soybean meal has been up 9 of the past 11 days! I had been trading soybean oil, but it has been flat for the past week. Perhaps meal deserves more of my attention! I sure like this chart! Soybeans has also continued to rise, but not as solidly and consistently as the meal. Wheat and corn are showing signs of price exhaustion the past couple of days.

I am watching the grains closely, but I am also watching stocks and the Dollar. The price of grains over the past few months has been linked to both to some extent. If the Dollar drops, that will be supportive of grain prices. The same holds true to a lesser extent with stocks. If stocks rise appreciably, that is also supportive of grain prices. If, on the other hand, the Dollar rises and stocks drop, it will tend to suppress grain prices.

But what will happen if a combination of the above occurs? For example, what effect with we see on grains if the stock market tanks, and the Dollar drops also? All bets are off in that situation. Perhaps we would see a consolidation, which is typical in an environment of conflicting fundamentals.