With uncertainty returning to markets and the problems of debt continuing to trouble investors, the dollar remains the primary beneficiary.  Of course, a strong dollar creates numerous problems for various asset classes.  In a recent strategy note, David Rosenberg of Gluskin Sheff notes the various ways to position yourself for a dollar rally:

Since the onset of the credit crisis in 2007, there have seen three occasions when a surge in risk aversion caused a period of U.S. dollar strength on flight-to-safety trades — July 15, 2008 to September 11 2008 (around the GSEs); September 22, 2008 to November 21, 2008 (post-Lehman financial collapse) and then from December 17, 2008 to March 5, 2009 (the final leg down in the financials). Here is what happened, on average, during these dollar-rally episodes — ultra-defensive strategies and heightened volatility:

  • The DXY (U.S. dollar index) rallied an average of 12.3%.
  • During these episodes, the Canadian dollar sank 11% against the U.S. dollar, but was only down 1.9% against a basket of non-U.S. currencies.
  • The S&P 500 corrected an average of 18.5%. Underperforming S&P equity sectors included materials, energy, industrials and financials. Outperformers included utilities, staples, health care, tech and telecom.
  • Despite the downdraft in commodities, the TSX performed in line with the S&P — losing 18%.
  • In the TSX sectors, the winners and losers were different than in the U.S.A.: Financials and industrials actually outperformed. Only materials and energy seriously dragged down the Canadian market. As in the U.S., staples, health care, utilities, tech and telecom outperformed. Outside of resources, the TSX sectors actually outperformed their S&P comparable.
  • Still, it pays to note that we are talking about “relative” performance. Every equity sector on both sides of the border was down during these periods.
  • The oil price, on average, fell 26%, and gold was off an average of 11%. The CRB index corrected an average of 22%.
  • The VIX index surge an average of 34% during these U.S. dollar-rally episodes.
  • We saw a bull steepening in the bond market — 2-year T-note yields plunge an average of 36bps while 10-year T-note yields dipped 8bps.
  • Baa corporate spreads widened an average of 54bps; and by 268bps for high-yield bonds.

Source: Gluskin Sheff


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Silver Dollar Coins

    I like these stronger dollar periods as they allow one to buy into gold and silver dollar coins, and other commodities for cheaper. But I still did not see in this article how to invest in a stronger dollar environment.

  • American Silver Coins

    yes, where are the strategies? any suggestions for a long-dollar-short-basket-of-foreign-currencies etf?

  • Living Off Dividends & Passive Income

    flight to safety results in a strong dollar and a jump in bond prices and a drop in yields.

  • Ag999.5

    The Question was; What if the dollar doesn’t crash? I’m left with an unanswered question….. Most people know that the “PROP of the dollar” is a signal to take advantage of low metal prices. So again, What happens if the dollar DOES NOT CRASH? My guess would be trillions on top of trillions of more paper will continue to “prop” until the inevitable…… These were warnings from Thomas Jefferson since day one but there are always those who think they know better and believe they can beat the odds……. Without mentioning names I’ll just say the guy who thought dropping the gold standard was a good idea and those who supported him without a care for their posterity….. Maybe he should have continued making western movies an left the economy alone.

  • golfcat

    Nixon made westerns? Darn. Missed ‘em.

  • Ag999.5

    Are you serious? You never seen a fistful of bull$@1T or The good the bad and the tricky? Both were blockbusters but where later out done by the Inglorious georgie bush… And “Condoleezza get your gun” You got ME!!! I was wrong, I had the wrong actor… Both were academy award winners but I’m sure ” The clown of weapons of mass destruction” will go down in Hollywood history as the act of all acts………..