IF HUGO CHAVEZ IS SELLING DOLLARS, MAYBE YOU SHOULD BE BUYING / BARRON´S

Wednesday, September 30, 2009

UP AND DOWN WALL STREET DAILY

If Hugo Chavez Is Selling Dollars, Maybe You Should Be Buying


By RANDALL W. FORSYTH

Venezuela's bond deal suggests the markets are getting a bit carried away with the dollar-carry trade.

VENEZUELAN PRESIDENT HUGO CHAVEZ may have been overshadowed at last week's United Nations confab by other high-minded diplomats such as Libya's Moammar Gadhafi and Iran's Mahmoud Admadinejad. But he did get to party down with entertainment luminaries after the New York premiere of "South of the Border," Oliver Stone's documentary about him, even though they were past-their-expiration-date types such as Susan Sarandon and Courtney Love.

At least Chavez didn't have to worry about ponying up the bucks to pay for his Big Apple junket. His government was issuing some $3 billion in dollar bonds, split even between a 10-year maturity expected to carry a 7.75% coupon and a 15-year maturity with an expected 8.25% coupon. So, he'll have plenty of greenbacks for his hotel bill, including whatever he got from the minibar.

The bond issue was designed to provide dollars to meet the demand for greenbacks among Venezuelans who, for some reason, would rather have dollar assets than their own bolivars. And the deal was working. Dow Jones Newswires reports from Caracas that the bolivar is up 25% from its August low, at 5.2 to the dollar in the "parallel" market, versus 7 to the buck a month or so ago, when greenbacks were scarce.

Venezuela thus joins the parade of foreign borrowers issuing bonds denominated in dollars. That means they're expecting to pay back those debts in devalued dollars.

As noted in this space previously, borrowing dollars to put to work elsewhere at higher yields is an example of global carry trade. And that effectively is a short sale of dollars, a bet on their decline.

The dollar-carry trade has been gathering steam since it was written about here months ago ("Money for Nothing and Bucks for Free," June 5,.) Earlier this month, Germany confirmed it would borrow in dollars to produce "savings for the federal budget," which would result from the currency gain generated by the dollar's decline.
Germany was followed by a flood of other offshore borrowers, from Abu Dhabi's national energy company to Sweden's Export Credit Corp to Hong Kong's Hutchinson Whampoa, all eager to borrow and repay in ever-depreciating dollars. Now, comes Hugo Chavez and Venezuela jumping on the bandwagon, borrowing and thus shorting the greenback.

"That to me is a sign the short-U.S. dollar trade is ripe for a reversal, when basically the biggest idiot in the house is short," writes Nic Lenoir of ICAP, the major money broker, on ZeroHedge.com.

Lenoir sees signs of a dollar rebound in the charts of various currencies, concurring with Barrons.com Getting Technical columnist Michael Kahn. In his latest column ("Signs of a Short-Term Dollar Bounce," Sept. 29), Kahn notes the U.S. Dollar Index is showing signs of pulling out of its downtrend. In addition, he points to recent technical weakness in the British pound, Canadian dollar, Mexican peso and Swedish krona, all components of the Dollar Index.

Similarly, Woody Dorsey's Market Semiotics advisory told subscribers: "The dollar faltered but had become so well discussed and relatively sober in its behavior that another uptrade seems to be operative." That argues for "a recovery for a few weeks" within a "secular profile" of "dollar debasement," it adds.

Indeed, the dollar's future has been a topic much discussion in the past few weeks. Most recently, World Bank president Robert Zoellick warned the dollar's central role as the world's reserve currency can't be taken for granted.

That's also been a theme here recently ("Take This Monetary System, Please,") But there doesn't seem to be an answer to the existential question about the future role of the dollar -- and by extension, that of America -- in the 21st century. At present, there is no ready alternative to the dollar-centric system ("Steeling for a Currency Deal in Pittsburgh?" Sept. 25.)

For the short term, there are an awful lot of folks playing the currency market, as the Wall Street Journal reported ("Small Investors Make Big Bets on Currencies," Sept. 26,) Plus, there is an array of exchange-traded funds that let anybody with an online brokerage account to be on the Australian dollar (ticker: FXA ), the euro ( FXE ) or even the Chinese yuan ( CYB ) or the South African rand ( SZR .) The bets seem to be on the demise of the dollar.

The markets tend to inflict the maximum pain on the most people in the short term. When most players are betting one way, it means the big money is taking the other side of the wager.

The big money is usually the smart money. If so, in what category does Sr. Chavez fall?

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved