WHY THE US DOLLAR IS TOPPING OUT
1. I think most will concede that the wall of debt facing the US and the refinancing of that debt has to cause a devaluation in the dollar at some stage. In the short term the massive pickup in treasury issuance and non treasury issuance (non treasury alone was a whopping USD 261 bill in Jan and 413 bill in Feb) is causing short term dollar demand. Obviously that demand is going to continue but at some point the sheer scale of US indebtedness will tip the scale.
2. The other primary driver of demand has been the flight from the European currencies on fears of greater relative risk because of issues like Eastern European debt and put simply the "global deleverage trade". There is however a growing voice that fears about Eastern Europe may be overblown. UBS have published a piece on this recently and are pushing this view hard. This idea may become more mainstream in coming weeks.
3. There is no doubt that the long dollar trade is very crowded.
4. The Yen is weakening again and this is taking the lustre out of the deleverage/derisk trade, which should begin to erode the foundation for dollar longs. In fact some large dollar longs have been partially hedged by long Yen positions, these hedges are likely to be scaled back as the Yen weakens.
5. 19th March is a key date from a cycle analysis point of view. It also coincides with an astrologically derived likely turning point. I had been focused on it as a likely intermediate term bottom (not long term) for global equity markets but I am increasingly thinking it may also mark a top in the dollar and perhaps a simutaneous low in gold and commodities.
Great Insight. Thought I would throw some stuff at you to further pick your brain. BTW, great blog very interesting info.
ReplyDeleteRe the USD - I agree with most of the above. I believe thought that there will have to be a real catalyst for a sustained negative impact on the dollar. I just don't see it happening in the next month or so. IMHO, the key is China. I think China is slowly putting itself in a position where it can hedge its USD exposure. Once it attains that, I think it will then pull the plug. In my view they are going about it by investing and securing long term commitments and interests in the resource sector. Just a thought.
I would really like to know what UBS has to say about the Euro. Frankly, I am currently with the herd in terms of potential disaster. I think the the Eurozone has never dealt with a crisis of this magnitude, and now the glaring disparities in the economies, wealth and thinking of the member countries is causing more problems. At the moment, I believe the fittest will survive, and if they believe sticking around will surely sink them, then perhaps bailing is a better alternative.
Your insghits much appreciated.
Thanks.
ReplyDeleteRe China I think your point is very good. That is a real factor.
Re Europe I am caught between this and the disaster scenario.
But the key is I want to keep an open mind now because I think we are approaching a key intermediate term turning point, so I want to view another scenario.
Also bear in mind I am not calling or thinking that there would be a massive move in the USD but a move back to .75 in AUD is very important to me from a wealth perspective.
I understand your concern re the AUD exposure you have. Have you considered the NOK. Net exporting country. No exposure to this mess. Solid sovereign fund. And you play the oil. It had appreciated considerably against the US from around 12 or 13 to around 5 Kroner. Now it is about 8. IMHO, there is some merit. I am shy of the CHF, USD and Euro. What are your thoughts on Swiss debt being 400+ of GDP. Another Iceland in the making?
ReplyDeleteGood insight, valid points.
ReplyDeleteNot to hijack a comment-thread, but as i don't have disqus user i'm posting here. Comment at Xtrends from you...
Can you tell the source on this?
---
GLOBAL IT HARDWARE: While CS was previously already the lowest # on the street, we now downgrade our CY2009 PC f'casts even further to -15.3% YoY [!] from -4.5% YoY. We assume desktops will decline -26.6% YoY and notebooks/netbooks only -3.7% YoY.->Exp.LCD supply glut in 1H to worsen & panel pxs to decline.
CS is CREDIT SUISSE
ReplyDeleteHornclawz
ReplyDeleteRe Switzerland. I think it is a massive concern for them. BUT I think that the Swiss know how to "move the goal posts" better than any race on earth and I will not bet against that. Just pure intuition and gut feel from years of working alongside them and in the last 9 years running money for them.
Your NOK sounds very interesting I will check it out.
I would have to disagree with your comment the wall of debt resulting in a devaluation of the dollar. In fact, I think it is quite the opposite. You say that the sheer size of the indebtedness will at one point cause a fall in the dollar. However, to quite the contrary, the deleveraging of this debt will only strengthen the dollar -- deleveraging deflation. As the debt begins to wind down -- since at a certain point it has to -- this will cause a drop in overall price levels. On the most basic of levels, it has been widely agreed upon that money will be used to pay down debts/save as opposed to adding to overall purchasing. This in turn leads to deflation.
ReplyDeleteSecond, I don't agree with you on the fact that the long dollar trade is over-crowded at this point. You can't say that since the dollar is the reserve currency of the world. As such it has always been over-crowded. It is the currency of choice, perhaps not in the future seeing how our gov't is handling things, but nonetheless, it still is.
Third, a weakening Yen shouldn't be the cause for a de-hedging of the long dollar/short yen trade. The yen has to fall in order for japanese companies to stay afloat, but that doesn't necessarily mean that the dollar has to fall relatively. Although the carry trade has unwound, the japanese public is now net long of the yen. Their demise doesn't necessarly mean that the dollar must be scaled back. And even so, a huge number of currency traders are banking on further falling of the yen and will only add this to trade as it is still in it's infancy.