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Archive for the ‘U.S. dollar’ Category

Dollar Devaluation, Stagflation, and How “You’re Getting Screwed”

Posted by Larry Doyle on April 29th, 2011 8:12 AM |

“Remain calm, all is well!!”

Such would seem to be the message put forth this morning by The Wall Street Journal’s lead headline, Officials Unfazed by Dollar Slide,

In recent days, the nation’s top two economic policy makers—Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner—have publicly expressed their desire for a strong dollar. But there is little indication of a change in policy from either the Fed or Treasury—or in underlying economic conditions—that would alter the currency’s downward course.

When thinking of Bernanke and Geithner, who do you think of first, Abbott and Costello or Laurel and Hardy? I am more in the former camp. “Hey, Abbbbbotttttt!!”  (more…)

All Eyes on the U.S. Dollar Index

Posted by Larry Doyle on December 7th, 2009 9:22 AM |

What’s leading the market both up and down?

Regular readers here at Sense on Cents are fully aware of my focus on the U.S. dollar as the primary driver of our markets over the course of the last half year. This past summer, the BRIC nations regularly railed on our greenback as the international reserve currency. Japan jumped on that bandwagon, as well.

The pressure on the greenback supported by the Fed’s easy money policy served as the fuel that launched our markets from the intermediate pullback experienced in early July.

Check out the patterns in the U.S. Dollar Index versus the movement in the S&P 500 since early July. These indexes are almost mirror images of each other. While the order of magnitude is not exact, the direction is very highly correlated.

I certainly believe this correlation will continue and rest assured active traders on Wall Street are watching this relationship closely as well. In fact, what happened overnight? Equity markets traded off as the U.S. Dollar Index continued to firm. (more…)

Dollar Carry Trade Remains in Vogue

Posted by Larry Doyle on December 4th, 2009 3:47 PM |

Today’s price action in the markets is very telling. What is it telling us? The dollar carry trade remains in vogue and technicals continue to dominate overall flows much more than fundamentals. Let’s navigate.

Recall that the weakness in the U.S. dollar has facilitated a large number of hedge funds, market speculators, and to a less extent investors to borrow dollars and buy a variety of risk based assets. What assets? Equities, a wide array of bonds, a basket of commodities, primarily gold. How are these sectors performing?

After an initial spike of 1-1.5% across the equity markets, these major market averages have retraced and are now effectively unchanged to slightly better on the day. Is that a sign of investors not believing in the details of the employment report? No, anything but. In fact, I believe the equity performance today is quite strong given the fact that the dollar has increased by 1.6%.

Bonds have traded in a very narrow range. Interest rates moved higher by approximately 12 basis points (.12%) and have sat there almost all day. The question that now comes back front and center is when the Fed will decide to raise rates. While most analysts had written off the possibility of an increase in rates prior to 2011, now analysts are projecting that the Fed may raise rates by mid-2010.

If rates do rise here, what does that do for our greenback? It will do better and it is doing just that today. As I referenced the U.S. Dollar Index has increased by 1.6%. (more…)

Liu Mingkang Provides Sense on Cents

Posted by Larry Doyle on November 16th, 2009 8:21 AM |

Liu Mingkang, Chairman of China Banking Regulatory Commission

Liu Mingkang, Chairman of China Banking Regulatory Commission

With friends like this, who needs enemies?

That trite saying is far too simplistic in defining the diverse and convoluted nature of U.S.-Chinese relations. That said, as President Obama prepares to arrive in the People’s Republic of China for the first time during his Presidency, he is faced with an extremely aggressive overture from Liu Mingkang, China’s chief banking regulator.

What does Mr. Mingkang have to say? Well, let’s just say he has a drastically different opinion on U.S. monetary and fiscal policy than his counterparts in Washington. While our wizards in Washington, Messrs. Bernanke, Geithner, and Summers would lead us to believe that the rebound in markets is a precursor to a rebound in our economy, Mr. Mingkang has a decidedly different take. The Financial Times sheds light on this topic in writing, China Says Fed Policy Threatens Recovery:

The US Federal Reserve is fueling “speculative investments” and endangering global recovery through loose monetary policy, a senior Chinese official warned just hours before President Barack Obama arrived in China for his first visit.

Liu Mingkang , China’s chief banking regulator, said the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”. (more…)

Dollar Carry Trade ‘Still’ Drives Global Equity Markets

Posted by Larry Doyle on November 9th, 2009 3:10 PM |

Has anything truly changed in our economy or markets over the last two months? Market analysts would attempt to gain credibility by overanalyzing each and every piece of data that comes along, but the very simple fact is that little has truly changed since I wrote “Dollar Carry Trade Drives Global Equity Markets” on September 16, 2009.

With the equity markets making new highs for the year, I am not so foolish as to ‘fight the Fed’ or ‘fight the tape’ while fully appreciating that the foundation of our markets and economy remain extremely fragile. In that spirit, what is driving the market ever higher? I resubmit my post mentioned above:

All aboard!!

As the U.S. Dollar Index makes new lows, equities make new highs and the momentum continues. Where is the ‘juice’ coming from? Is this cash that had previously exited the market now reentering? Is this people who had gone short now being forced to cover? Is this ‘new’ money finding value? Is this a pickup in short term day trading? The answer to all of these questions is yes, albeit to varying degrees. However, the most widely held belief for the rally in the market is the dollar ‘carry trade.’

I highlighted this trade last week in my September 12: Month to Date Review of the Markets. On that day, I wrote about the U.S. dollar: (more…)

Nouriel Roubini Agrees with Jeff Gundlach

Posted by Larry Doyle on October 27th, 2009 11:18 AM |

Dr. Doom agrees with Wall Street’s top fixed income manger? Who are these individuals and on what do they agree?

Both these individuals are Economic All-Stars here at Sense on Cents (see left sidebar).  Nouriel Roubini (aka Dr. Doom) and Jeff Gundlach (aka Wall Street’s top fixed income manger) possess a contrarian view on the future of the U.S. dollar. While most analysts, economists, traders, investors, and speculators call for ongoing weakness in the greenback, Roubini and Gundlach believe the dollar will rebound and risk-based assets will retreat.

I addressed Gundlach’s views on this market driving principle on September 10th when I wrote “Jeff Gundlach of TCW Calling for Deflation and Dollar Rally”: (more…)

Dollar Devaluation Is a Dangerous Game

Posted by Larry Doyle on October 8th, 2009 9:24 AM |

Can we ‘devalue’ our way back to our days of economic ‘wine and roses?’

Many debt-laden countries throughout economic history have chosen to implicitly or explicitly pursue a devaluation of their currency as a means of improving their economies. Are the ‘wizards in Washington’ taking this approach? Aside from a few perfunctory comments in defense of the greenback, Washington has been largely silent on the topic of the declining value of the dollar. Many believe Washington very much favors a weaker currency as a means of supporting our economy. I believe this of Washington, as well. Let’s navigate.

Going back to the G20 in London last Spring, the Obama administration has attempted to curry political favor with emerging economies, especially the BRIC nations, by ceding dollar sovereigncy as the preeminent international reserve currency in return for support of global economic stimulus programs. Why does Washington believe a weak currency serves our economic interests? A weak currency generates and supports the following:

1. Promotes inflation as imports decline. Washington would like some inflation, given the massive deflationary pressures presented by falling wages and declines in the value of commercial and residential real estate.

2. Promotes exports for corporations with a multi-national presence.

3. Supports labor by making it more attractive for companies to keep jobs here as opposed to opening factories or sending work overseas.

So, in light of our current economic crisis, why wouldn’t we want a substantially cheaper dollar to maximize these benefits?

Recall that economists always need to keep certain variables static in order to study the impact of a change in another variable or multiple variables. This approach, known as ‘ceteris paribus,’ is not quite as easy as some may think. Why? Variables are NEVER static, or ‘ceteris is NEVER paribus.’ (more…)

Is the Federal Reserve Readying a Stealth Tightening of Monetary Policy?

Posted by Larry Doyle on September 22nd, 2009 4:11 PM |

The Federal Reserve impacts the economy by raising and lowering the Federal Funds Rate. With the Fed Funds rate currently at a range of 0-.25%, the Federal Reserve has no more ammo to positively impact the economy, right? No! Readers of Sense on Cents are fully aware of the other measures the Fed, in conjunction with the Treasury, has utilized to inject money into the economy, including:

1. quantitative easing in which the Fed has purchased U.S. Treasury and mortgage-backed bonds
2. backstopped money market funds (FYI . . this program ended last Friday)
3. providing federal guarantees for banks to issue debt
4. facilities to assist in the issuance of securitized assets (TALF)

Collectively, these programs have achieved an effective negative Fed Funds Rate. This development is not only historic but very daunting for the economy and market. When and how will the Federal Reserve and Treasury begin to exit some of these programs, and take some liquidity out of the system without spooking the markets? In the process, the Federal Reserve will begin a de facto tightening of the monetary policy even if it does not immediately begin to raise the Fed Funds Rate.

This tightening process may be in its formative stages. How do we know? Bloomberg reports, Fed Said to Start Talks With Dealers on Using Reverse Repos:

The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.

Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.

Given the amount of liquidity the Fed has pumped into the economy over the last year, these reverse repurchase agreements would have to be of huge size and for a longer tenor in order to truly make an impact.

What would be the impact of sizable reverse repurchase agreements? I would make the following assessments based upon my feeling that the market would perceive these agreements as a tightening of Fed policy:

1. the yield curve would flatten, meaning short term rates would raise relative to long term rates (revisit your Algebra II chapter on slope)

2. the U.S. dollar would strengthen as the market perceives this move an indication that the Fed is closer to raising the actual Fed Funds Rate than it was previously.

3. the markets, both equities and bonds, would very likely sell off in a reversal of the price action of the last six months. Both our equity and bond markets have been supported by the cheap funding provided by the Fed. This phenomena led to the dollar carry trade which I highlighted a week ago in writing, “Dollar Carry Trade Drives Global Equity Markets.”

The dollar is getting hammered again today and that fact is supporting our markets, both equity and bonds. Watch the US Dollar Index as it is clearly the best indicator as to the Fed’s intentions and market direction. If and when you see the dollar start to improve (currently quoted at 76.13), then look for stocks and bonds to weaken.


Dollar Carry Trade Drives Global Equity Markets

Posted by Larry Doyle on September 16th, 2009 2:18 PM |

All aboard!!

As the U.S. Dollar Index makes new lows, equities make new highs and the momentum continues. Where is the ‘juice’ coming from? Is this cash that had previously exited the market now reentering? Is this people who had gone short now being forced to cover? Is this ‘new’ money finding value? Is this a pickup in short term day trading? The answer to all of these questions is yes, albeit to varying degrees. However, the most widely held belief for the rally in the market is the dollar ‘carry trade.’

I highlighted this trade last week in my September 12: Month to Date Review of the Markets. On that day, I wrote about the U.S. dollar:

Commentary: The decline in the value of the U.S. greenback by approximately 2% reminds me of the overused Wall Street phrase, ‘squeal like a pig…’

The fact is Big Ben Bernanke is not only funding the domestic economy with the Fed Funds rate at 0-.25%, he is also funding the spike in a number of markets around the world. How so? Investors around the world have entered and, given this week’s price action, continue to enter into the ‘positive carry‘ trade in which they borrow U.S. dollars to purchase higher risk assets.

This ‘positive carry’ trade was fed by the Japanese yen throughout the ’90s given the exceptionally low rates in that country.

Make no mistake, though, this ‘positive carry’ trade is nothing more than implementing leverage. Do not confuse leverage with brains when a market is rising because as I said the other day, leverage is death when that bull becomes a bear. As I think of market developments, I am convinced that this ultimate unwind of leverage trades currently being implemented is Jeff Gundlach’s reasoning for being bullish on the dollar. How will this work? Investors will look to exit their risk based investments (emerging market stocks and the like) and buy back the dollars which they have borrowed. In the process, the dollar may rally significantly. The timing of this unwind is the critical question.

This morning, the Financial Times weighs in with Dollar Lays Claim to Being Top Carry Trade Currency:

For years, the yen was the currency of choice to fund international carry trades. But is the dollar starting to take its place?

Analysts say negligible US interest rates, its quantitative easing measures and little sign that the country is set to withdraw from its ultra-loose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade.

“This puts the dollar in exactly the same position as the yen back in 2001 and makes it naturally attractive as a carry trade funding currency,” says Simon Derrick at Bank of New York Mellon. “The dollar is the new yen.”

The carry trade strategy, in which low-yielding currencies are sold to finance the purchase of riskier, higher-yielding assets, was widely used in the years prior to the eruption of the financial crisis.

The FT further adds,

Speculative positioning data seem to back up the shift against the dollar, revealing the extent of recent deterioration in dollar sentiment.

According to figures from the Chicago Mercantile Exchange, which are often used as a proxy for hedge fund activity, aggregate bets against the dollar versus the euro, yen, Swiss franc, sterling and the Australian, New Zealand and Canadian dollars last week rose to their highest levels since July 2008, when the dollar hit a record low against the euro.

Is utilizing the dollar for funding purposes a harmless risk-free trade? Anything but. A weak dollar impacts all dollar-denominated assets and dollar-denominated transactions.

For those entering into these transactions, a sharp reversal in the dollar or in the assets being purchased can lead to tremendous losses. For now, though, traders, hedge funds, and speculators the world over are selling dollars to put this dollar carry trade on . . . in size!

What do our ‘wizards in Washington’ have to say about the plummeting dollar? You can hear a pin drop.


UN Calls for New Global Currency in Place of Greenback

Posted by Larry Doyle on September 9th, 2009 11:04 AM |

What drove the U.S. dollar dramatically lower yesterday? How about a communique from none other than the United Nations Conference on Trade and Development. UNCTAD recently released a statement in which it proclaims:

Given the prevailing major shortcomings in the international financial and monetary system, UNCTAD draws attention to some elements of reform of the international financial architecture, which is long overdue. These include effective capital account management, strengthening the role of special drawing rights (LD’s highlight), and a multilaterally agreed framework for exchange rate management. These reforms imply a fundamental rethinking of global financial governance to stabilize trade and financial relations by reducing the potential for gains from speculative capital flows. This will reduce the likelihood of similar crises in the future and help create a stable macroeconomic environment conducive to growth and smooth structural change in developing countries.

I purposely highlight the UN’s desire to strengthen the role of special drawing rights. In layman’s terms, that means the UN wants to promote the currency of the IMF at the expense of the U.S. dollar.

When BRIC nations promote a move away from the U.S. dollar, one may view it as the competitive nature of international trade. When an entity such as the United Nations is also promoting a move away from the U.S. dollar as the international reserve currency, we are embarking on an entirely new slope along our economic landscape.

The fact that we have heard little to nothing from our power base in Washington leads me to believe that Obama, Geithner, Bernanke, Summers, et al are comfortable with a decline in the value of our currency.

In my opinion, that comfort can be a very dangerous long term maneuver. How so? Economic growth requires capital. If investors deem our currency to be weakening, the capital will flow elsewhere . . . and elements of our quality of life may go right along with it.


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