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Investors Need to Closely Watch Mario Draghi's Speech at Jackson Hole: Market Recon

"Too many people today know the price of everything and the value of nothing." -- Ann Landers

Lay of the Land Another closing bell. Another record close. It's not even news anymore. The long-forgotten Dow Jones Industrial Average is again everyone's favorite "broad" measure of stock market performance (after a 25-year hiatus), now that this is what the president refers to as "the market", and now that this index of 30 of the bluest chip stocks has closed at a record for nine consecutive sessions. By the way, the all-time record for consecutive closing highs is 12, and if you think that you can't remember that far back, it was done most recently this past February, when American children regularly went to bed at night with visions of 4% GDPs, and "massive" corporate tax reform dancing in their heads.

What Americans did get was almost as useful, at least for firms with the most overseas exposure, and that has been a cheaper U.S. dollar. The greenback is down a rough 8.7% on the year when measured broadly against the weighted basket of foreign currencies known as the US Dollar Index (DXY). That basket is most heavily weighted against the euro, which in isolation is around 12% stronger vs. the U.S. dollar year to date. The DXY is currently bouncing around the 93 level. Short positions versus the US dollar are being made a big deal of right now. Bearish bets against the U.S. dollar have reached an aggregate $7.9 billion as of last week, according to the CFTC. This collective negative bet against the U.S. dollar is at its largest total since 2013. We all know that the DXY spent most of 2013 flirting with the 80 level. The DXY took off to higher levels in 2014 only when it became apparent that the Fed was going to halt its quantitative easing program.

What do traders think? The 80 spot on the DXY suggests a U.S. currency that could have a long way to go to the downside. The large bearish position, and the imminent change in monetary policy that will likely come to be known as quantitative tightening, or balance sheet management, suggest a turning point in the U.S. dollar valuations. Hmmm. What does this trader think? I think that Mario Draghi's speech at Jackson Hole will be decisive in the short-term. Markets are looking for a signal regarding the ECB's own program of monthly asset purchases. Europe is doing much better than it has in quite some time versus where the continent was not too long ago. What are the chances of a Draghi dovish surprise? I wouldn't bet the farm on anything. You know he will get hammered at home if he says anything that takes the euro higher. A DXY...


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