In the last three days the markets seem to be signaling that something has changed. The non US stock markets that had previously recovered the most are now the biggest underperformers. Commodities are showing the same underperformance. The dollar is slowly recovering. It seems that the market is testing the general consensus that the rest of the global economy is recovering at a great speed and the G7 economies will benefit from the spill-over effect.

Are three days enough evidence to show a drastic change in global macro? Obviously it is not. But it is relevant to ask ourselves if the original vision is valid, as well as, if the interest rates in the US will allow for a comeback of the dollar. The dollar has been depreciating at a very high speed and we would not be surprised if there would be a pause. The dollar was at its strongest on March 9 at a rate of 1.2611 against the euro. Since that day, it has depreciated more than 17% to 1.5033 till last Thursday. We believe that the recovery seen in the last 3 days is similar to other periods of high volatility.

Our vision is that the dollar will have a comeback when the market perceives that the Fed has greater chances of increasing the short term rates. This most likely will coincide with an economic recovery and or higher inflation. We believe that such a policy will not be put into practice soon (given that a weak dollar has economic benefits) therefore we do not think we are at the beginning of a recovery of the dollar. Nonetheless, whenever the recovery materializes we expect to see a violent one. We think we will experience what we saw in the early 2006 when Japan voiced a reduction of the yen –carry-trade. We are now living in a dollar-carry- trade environment and we expect a similar reaction when the chances of greater short term interest rates increase. Our portfolios have less than 60% exposure to the dollar.

We have to differentiate the depreciation of the dollar vs. G7 (euro and jpy) and vs. other stable currencies including emerging markets ‘. We strongly believe that the trend of increasing interest rates that we are observing in the less affected emerging markets economies will continue. This phenomenon will generate capital inflows.

Therefore, we are monitoring commodities’ valuations for a potential reduction in exposure as well as valuations on currencies that we believe will continue to appreciate vs. the dollar to increase the exposure in the portfolios. We also are watching Asian stocks very closely, given that this trend will impact those assets as well. All these portfolio chances should be viewed as profit taking, since most of our vision has materialized. We will continue to monitor any possible changes in the economic environment that will generate a change in the dollar-carry-trade.

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