Posts tagged dollar
The siren song of dollar weakness

A weaker dollar seems to be the answer to everyone’s prayers at the moment—or more specifically, investors want exposure to the exceptionalism of U.S. capital markets without the currency exposure that comes with it. From the BIS, via FXStreet:

Many investors still want to remain invested in US equities (belief in US exceptionalism is alive and well!), but at the same time, they see growing risks for the US dollar, not least due to the US government’s attacks on the Federal Reserve. A significant depreciation of the dollar could reduce the returns on the actual equity investment or even wipe them out entirely. So what is the solution? Hedging against dollar weakness. Ultimately, these hedges are effectively bets on a weaker US currency and, if widely adopted, create selling pressure on the dollar."

Read More
Global Economy, International Trade, International Trade and Economics , Markets and Trading, Monetary Policy, US Economy, US politics and societyclaus vistesenUS dollar, rebalancing, Miran, Stephen Miran, Donald Trump, trade, economics, equities, dollar, FX
The Riddle of the Dollar

Judging by the latest virus numbers in Europe, and government announcements to contain it, markets may soon have to read up on the math of lockdown economics. Before we get to that, though, investors have been locked in deep thought over the impact of the U.S. presidential elections, which seems to converge on trying to price in the consequences of a Biden victory and a “blue wave”. As I explained last week, investors seem to have concluded that this is good outcome for risk assets, though as I argued at the time, this isn’t entirely clear to me. To illuminate this further, it’s useful to consider how markets perceive a Blue wave in the context of the dollar and the U.S. bond market. As it turns out, the consensus position isn’t entirely clear, which is a hint. If markets can’t figure out how a Democratic sweep will impact the dollar and bonds, it’s difficult to have any view on how it would impact equities. The dollar is particularly interesting. It seems to me that analysts initially pinned recent weakness—effectively since April—on the inherent political risks associated with a Biden presidency, though it has since morphed into a bullish catalyst in the context of the expectation of surge in fiscal stimulus, funded by a benevolent and compliant Fed. Why this latter should necessarily be bearish for the dollar isn’t clear to me, especially not if it led to stronger growth in the U.S. compared to the rest of the world. By contrast, the idea, voiced in some corners of the market, that the U.S. is on its way to print away its exorbitant privilege—in effect losing its reserve currency status—seems even more ludicrous to me, even in world where China is now emerging as a potential adversary.

Read More
Markets and Trading, US politics and societyclaus vistesenDXY, dollar, USDCNY, China, Joe Biden, Donald Trump, U.S. elections, U.S. politics, U.S. treasuries, yield curve control
We're all short vol

I meant to publish this entry before I went on holiday, but time got the better of me. My initial impression of markets and the economy as I get back in the saddle is that I haven’t missed much. As such, after hitting F5 an awful lot of times to pull my spreadsheets into the present, I am left thinking about the same themes that I have since Covid-19 ripped up the script. Actually, I am pondering the same themes that I was mulling before the virus too. Economists and analysts are running out of ways to describe the current regime, but in a nutshell, the state of play is as follows. The virus was the straw that broke the camel’s back, prompting policymakers to double-down on the fascinating experiment they have been flirting with, in some form or the other, since the onset of the great financial crisis. How much fiat currency can be created before it either destroys capital markets via inflation, or perhaps more likely, sows political disaccord, if not outright kinetic conflict? I am neatly leaving out the prospect of policy actually getting it right, which is to say; the idea that a new equilibrium is obtained which allows monetary and fiscal policy to seamlessly leave the stage. After all, why would policymakers give up the power that they’re currently being offered by economic events? Luckily the answer to the first part of this question seems to be a very long time, and quite possibly well within the investment horizon for many investors. As a result, investors are being invited to pick up dimes in front of the proverbial steamroller, at gunpoint for added effect. History suggests that they will do just that, until something breaks.

Read More
Global Economy, Markets and Trading, Monetary Policy, US Economyclaus vistesenequities, bonds, dollar, volatility, Covid-19
Has the easy money been made?

As my previous post can attest, my mind has been focused elsewhere in recent weeks—and I am also preparing a my next long-form essay to boot—but I thought that I’d have a peak at markets all the same. The Fed’s (non)decision on yield curve control came and went without any significant shift. The FOMC has now locked down the funds rate until the end of 2022, at least, more or less in line with what markets were already expecting anyway. That said, the shift to “time-contingent” forward guidance—over 30 months no less—is a significant step. It caps a remarkable transition from a Fed on auto-pilot in late 2018—with the 2-year yield aiming for 3%—to one now “not even thinking about thinking about raising rates.” A lot of water has gone under the bridge since then, but it’s difficult to escape the conclusion that the shift in U.S. and global monetary policy over the past 24 months is fundamental. The idea of a central bank put was born a long time ago, but it’s difficult to imagine a version stronger than its current form. Quite simply, policymakers wonʼt tolerate, and canʼt afford, tightening financial conditions, of any kind, and over any time horizon, however short and temporary. I have spent considerable ink on these pages arguing that this makes the rebound in equities, in the face of a crashing economy, more-or-less reasonable. In fact, it’s normal for equities to exhibit their strongest return-profiles early in the rebound, as a positive function of sharply rising excess liquidity as policy shifts, but also simply thanks to a low base. After all, it has to pay for those with the guts to buy at the lows.

Read More
Markets and Tradingclaus vistesenS&P 500, dollar, Fed Watch, Federal Reserve, emerging markets, rates