Technical traders are probably familiar with the saying that “the trend is your friend.” It suggests that the trader has bigger chances of turning a profit by following the overall market direction instead of having a contrarian opinion.
Yet, contrarian trades are the most rewarding ones. All legendary traders/investors built their fortunes by having a contrarian opinion against the market. By thinking outside the box, both from a technical and fundamental point of view, contrarian traders/investors look for clues against the general market direction – or the trend.
2021 was labeled as the year of a lower dollar. So big is the short dollar crowd that the year ended with the biggest dollar shorts in a decade. Let that sink in for a while….
What If the Dollar Appreciates in 2021?
When talking about the dollar, a trader does not refer to the FX market only. The value of the dollar and its trend affect all markets – equities, fixed-income, etc. Therefore, a change in the dollar’s trend is important for all investors.
At the end of the last year, as usual, Bloomberg published a list of the major investing houses in the world and their forecast for the year ahead. Not one (!) called for a higher dollar—instead, all bet on the dollar’s decline and the reflation theme.
A contrarian view, therefore, would be to bet on a higher dollar. Why would anyone buy the dollar when the Fed printed over 30% of all dollars just last year?
First of all, only the idea that everyone is on the other side of the market is appealing. If the contrarian view is correct, the speed of the dollar’s appreciation will happen much faster, as the market will start tripping stops. When bears see their stops triggered, in order to close a short position, the broker will buy, so to square a trade. Hence, it will be like fighting fire with fire.
Second, a contrarian trade offers a great margin. In Sam Zell’s words (one of the biggest investors in the world” – “if nobody in the world agrees with me, and if we are right, we would get pretty serious margins.”
I am not saying that the dollar will appreciate this year. I am just pointing out the fact that whenever there is such a consensus, the right direction is usually the opposite one.
This week’s inauguration of the new President of the United States starts a new era in the country – one of reconciliation and re-establishing America’s place in the world. The dollar may just play a crucial role in the process.