Market Thoughts – Are You America’s Friend or Foe ? USD is Not Cool.
Scrolling through my email’s In Box, I am stumped by the number of synonyms of the words STUMPED and STYMIED in the various titles of fx market commentaries, analyses and reports I have received in the past week.
STUMPED = STYMIED = Bizarre = Frenzy = Bewildered
And you really cannot blame them, the analyst, the chartist, the strategist or the economist, waking up each day to dissect the market in the way they know best. But nothing has gone right lately.
The worst call banks have made in FX this year has been the USD call which is the logical call most have piled into and still remained vested in. (Not to mention the taper sell bonds calls)
In fact, this is one of those rare years where almost every asset class has rallied in synchrony so far.
The 4 top positions of fund managers currently according to Citi are as follows.
1. Short EUR
2. Long USD
3. Short JPY
4. Long NZD
Some hypothetical technical portfolios are showing horrendous returns on the year, stopping out of short GBP, looking ugly on USDCHF, USDJPY etc and barely hanging on for short EURUSD.
The USD is taking a beating and the big mystery of the year is that no one knows for certainty who is doing it or why with most reasons given to market positioning and stop losses, missing out the invisible central bank and their reserves flow, along with sovereign wealth allocation activities.
Faced with plunging Obama popularity, blockades on Russian money, BNP embargoed from USD settlements and the US Supreme Court blocking USD payments for Argentina, I suspect sovereign powers are nervous about the US and the USD as a safe haven asset these days.
Europe looks, by far, a more amenable and neutral choice.
When we look at the DXY Index which is 57% EUR, 13% JPY and 12% GBP, the USD has underperformed on the year even with the real threat of negative interest rates in Europe. But the results of the USD against the rest of the world is hardly credible with most major currencies registering broad based gains against the USD for the year with the exception of a few like the CNY, SEK and RUB.
GRAPH : DXY USD INDEX
And even the amongst the rest of the world, the USD is lagging with 114 out of the 176 currency pairs quoted against the USD in Bloomberg outperforming year to date.
My hypothesis is that geopolitical risks are playing a bigger role in global fund flows than we think. The players are governments themselves.
https://tradehaven.net/market/geopolitical-risks-and-me-and-you-cash-is-king/
Friends of the US can keep the USD but those who are not sure about their friendship better not be holding on to too much of it. Because you never know when the US might decide to freeze your assets for petty crimes like dealing with Russians ?
Wise old China has moved in to internationalise their currency, choosing to settle in their own money and setting up CNY hubs around the world including London, except in the US.
My opinion is that the current market levels are signs that the USD is losing clout more quickly than we think. And the biggest alternative to the USD is …. the EUR.
Whilst EUR carry trades still appear to be the majority opinion of fund managers and strategists and they have shifted the view to a medium term one as the EURUSD has demonstrated remarkable resilience into the half year end. https://tradehaven.net/market/fx/taper-vs-negative-rates-not-much-to-choose-from-sell-eur/
From 1 May 2014 vs EUR
The EUR has outperformed against the USD in the past fortnight even as short EUR positions in the market build to a new 1 year high.
That is because as layman logic lies, the EUR is still a short but as far as national reserves are concerned, the USD is a “worthless” friend, as the Polish Foreign Minister was quoted in a private context which is now embarrassingly public. http://www.theguardian.com/world/2014/jun/22/poland-foreign-minister-alliance-us-worthless
If not USD, then most likely EUR (just on quantity of supply), or any of the other currencies in the table above.
My conviction on the EUR vs rest of the world carry trades remain into the ECB meeting tomorrow evening. https://tradehaven.net/market/fx/the-european-investment-case-carry-away/
As for the EURUSD, the logic of taper vs negative rates is pretty infallible. Yet with the market so overwhelmingly convinced, along with myself, and the fact that we could up against national reserves suggests that my 1.34 target for EURUSD which I mentioned previously is probably the best case scenario in the near term.
Appreciate you and Bernard keeping up the insightful commentary. Thought I should share this article with you in return as it suggests that the reverse of your hypothesis may be equally valid – it is global fund flows that play a bigger role in geopolitics today than the other way round. The players – governments, as you pointed out – remain the same.
http://www.foreignaffairs.com/print/138590
That is a good article indeed.
Money makes the world go round.
China is in a mad rush to establish swap lines and set up CNH clearing centres around the world while the US central bank is busy minding their own business.
Long term TIC flows for US negative and below long term trend – making history for a new world order ?
The trouble with most views on the markets is they contain too little logic, not too much. The trouble with people who criticize views for being too logical is they usually don’t know the difference between a logical thought and, say, a carrot. The trouble with the herd like 2013 consensus view that the USD would strengthen and bonds would weaken was not that they weren’t smart enough to know about “geopolitics”, it’s that they didn’t think hard enough about economics. As for the notion that Russian oligarchs worried about frozen accounts panic selling their USD is just humorous to me…the “logical” thing would be to just move their cash to a safer jurisdiction, the currency their endangered accounts are denominated in makes no difference whatsoever to whether those accounts are being frozen. And by the way, extremely wealthy people generally got extremely wealthy by being pretty logical people…your psychics, spiritual thinkers, wannabe Zen Buddhist on the mountain, gut movement deciders or feng shui strategists rarely become billionaires…although they might survive as market makers or bank sales people for a while, and will certainly have plenty of sympathetic ears in bars and coffee shops. No, I think the truth of the matter is people just didn’t appreciate how dovish the Fed was going to remain, that weakened the Greenback and it caused Bonds to rally. It was wrong to believe that the fed would signal rate hikes at the same time as embarking in its tapering program. And it was known historically that bonds have rallied after qe and sold off during….so why would tapering cause a bond market sell off, especially given known bond shortage. And if bonds weren’t likely to sell off then why would the USD strengthen if rate differentials were likely to stand in the way of that dynamic? I won’t even get into technicals, short covering etc, I will leave that to everyone’s imagination. In essence, the market wasn’t logical enough, not the other way around.
What’s interesting to me is that dovish US monetary policy and China’s more adventurous financial behavior appear to mirror broader geopolitical patterns. The US is in a relative military retreat globally, in part because of defence spending cutbacks. But I reckon this shift is more likely underpinned by a strategic reinterpretation of the US’ global role as the military of last resort, perhaps catalyzed by the 2008 crisis. War is expensive to wage.
New regional balances are evolving because of the US military becoming more passive (or dovish). Russia has muscled into Ukraine changing ground realities in Europe and for NATO. China pushing the envelope in the South China Sea unimpeded has spurred Japan to reinterpret its self-defence doctrine. In the Middle East, local powers jostle amidst the US’ withdrawal from Iraq and a US-led rehabilitation of Iran. The geopolitical rebalancing and search for alternative regional partnerships required by these developments mirror that of some governments seeking an alternative to the “dollar-dominated global financial architecture”.
I reckon we are headed towards a more volatile geopolitical future where regional actors play a more active role under a global US security umbrella. Whether this represents a new “order” is unclear but it will result in more risk because of the loss of predictability. Absent systemic shocks, however, I would not write off the US-led security and financial order, perhaps at least for the next decade, especially when the US is poised to become the world’s largest energy producer while remaining a peerless military power.
Causation and correlation often become mixed up. You know Rolf Harris was just jailed in the UK for groping some girls a few decades ago…but I can assure you that wasn’t why Carney sounded a little more hawkish recently. Likewise, the Ukraine, the US departing from Iraq, China opening some more swap lines, El Nineo, the phases of the moon, the migration of a particular duck across the plains of Africa…none are actually relevant. There is no mirroring going on….bonds rallied before the Ukraine got serious, the USD weakened before too. it was as I said just that the market jumped the gun on the Feds policy switch. It wasn’t that these “geopolitical” forces forced the Fed to readjust, that they had some kind of emergency meetings in secret, and decided not to hike after all. And by the way, even though it’s enough that these world events were actually not early enough to alter the course of the Fed, they also aren’t that significant. Again, the world likes to blow things up, especially when it comes to the reported death of America and the rise of China and Russia, and by the way I’m not American. Putin isn’t some kind of evil, chess playing genius. He looks to me like a sniggering, creepy dictator who saw an opportunity to mess with a neighboring country and he presides over a wreck of an economy…resource dependent, aging, suffering constant capital outflows and by the way that “massive” gas deal with China….it’s the equivalent of less than 25 million iPhones a year…10 million if you factor inflation into the 400 billion spread over its 30 year tenure…Apple sold 125 million of them in 2012 alone. It’s nothing, it’s actually pathetic that it was trumpeted as if it was some kind of new Suez Canal of Siberia…and by the way, Russia has to build and pay for the pipes…think that will be cheap? As for China, it is also aging, they have turned their whole country into a polluted cesspool, their model of cheap labour and outsourcing for the West still has nothing to replace it, their richest and brightest still mostly want to leave and it is rotten to the core, hence their attempt to crackdown on corruption…but a bit a late really….stable doors and horses etc come to mind. Oh, did I mention their massive corporate debts, more extreme than in the West? I don’t think the future is quite as cut and dried as coffee shop banter would have you believe….if anything I think the future will as you say become more volatile, but it isn’t clear who the eventual winners will be. And even if volatility lies ahead, that still didn’t cause the USD to weaken last year.
The logical mind can be illogical in our desperate search for something to blame. Because the concept of randomness is a bit too raw to digest.
Reporters and journalists make their living in giving people things to think about and experts have to justify their existence and stature.
I think the truth is not as important as the number of people who believe in it.