Citigroup - The Last Recourse Against Runaway Inflation? A Commensurately Greater Jump In The Dollar

Tyler Durden's picture

Citi's head of FX, Steven Englander, has some contrarian observations on the fate of the US dollar, which a more nuanced read may even indicate a slightly conspiratorial bent, namely that in order to cut the surging global inflation dead in its tracks (alas, too late for the regimes of Tunisia and Egypt), the dollar will have to surge even more. To wit: "If the world’s inflation problem is primarily derived from rising commodity and food prices, it is very likely that a stronger USD will help mitigate this inflation quickly and efficiently. There is a well established relationship between USD strength and weaker commodity prices." Of course, with the Printing Dutchman at the helm, what hope is there for a sustainable strong USD thesis: "The problem is that there does not appear to be a market driver for USD strength." Yet this could very well be the contrarian trade going forward as the G-20 looks aghast at events in Africa and realizes that the "last case" scenario just seems that much more credible. If this happens and there a concerted effort to reincarnate the dollar, look for the EURUSD to plunge, and all USDXXX pairs to surge in the following days, especially as the carry funding shorts realize that they will once again, just like in late 2008, be the sacrificial lambs at the altar of "Kicking the can down the road one last time"-dom. Quote Englander: "During a similar high commodity price episode in mid-2008, we saw some evidence of high reserves growth, which is unusual when the private sector is buying dollars. Moreover, then as now, market macro investor positions appeared to be long commodities. While it would be unusual for reserve managers to buy USD for inflation stabilization reasons, as a quick solution to a major problem it may be more effective than most."

Full must read note from Citi, which may explain why Goldman suddenly high tailed it out of its 1.40 tactical EURUSD target without hitting it and just two days after the revision.


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tellsometruth's picture


Good work here.  An important counter note is brought to light, and is worth considering...

Keep the free thinking aspect of this forum alive, and it will continue to be one step ahead of the curve.

unununium's picture

No "mechanism" for a higher dollar, even with the money printing presses working overtime?  The trusty standbys are in play already

 - War, revolution, armed uprising

 - Euro disintegration

 - Soon more banking collapses, causing flight to Treasuries

 - Stock market collapse, causing flight to Treasuries

chrisd's picture

Exactly right. We saw it on Friday as the market fell and 10Y yields fell with them. As the market collapses, we will have a redux of 2008 with everyone running to the "safest" option, the US.

EscapeKey's picture

Those are only temporary plays, though.

topcallingtroll's picture

I will take "temporary."   We just need more time for gdp to get moving so we can eventually be weaned from Bernanke's ugly man tit.

GoinFawr's picture

hahahhahahahahah...'safest', now that's an oxymoron.  But if this article is right, it could be viewed by those with large USD holdings as  their final round of last chances to 'divest while the divestment is still good' (aka "No Tomorrow").

Any idea where they might go? The whole  'dollar up, everything down' thingy doesn't always work that way for all things. Eg. Late July and early August of last year Gold bounced off a low, and USD did too, for awhile...


IE This isn't 2008, IMHO.

MachoMan's picture

The difference between now and then is that precious metals have decoupled...  instead of a total panic into the dollar, that panic is shared with other items, namely gold and silver...  the death bell has already rung...  and each subsequent panic will lead to less and less trust in the dollar as a bastion of safety...

And that's the best case scenario...

bonddude's picture

NYTime paper santa rosa pressdemocrat now on this banking fraud story that leads 

all the way back to IndyMac failure.

Town paper in Sonoma trying to cover up banking fraud,ignores story for years.

Michael's picture

My new Youtube video;

I had to redo the sample sound tracks on my original version because of Time Warner copyright infringement of the thousands of labels they own, and it was banned in the USA that kept you from seeing it the first time I posted it.  I found a couple of my other favorite tracks on British labels that I used. I must say, they did me a favor because I had a second chance to tweak it and make it better.

Video Description;

Homey D. Clown comes out of hiding to support the Revolution. He don't like that Police State Shit, nor da man, thus Revolution. Yours is a peaceful revolution to keep your freedoms and liberty. But when push comes to shove, sacrifices will be made, and they know it. They also know, they can't get all of us.
I made this Youtube in honor of the world wide Revolution.
Please spread it around if you like it. Please rate it and leave a comment.

Homey D. Clown Don't Play That Police State Shit Thus Revolution

bobert's picture

Hollywood here you come.

Michael's picture

It took a while to make. Thanks.

Mr Lennon Hendrix's picture

I can see it now,

With fifteen minutes to go before the collapse of the financial system, Bernanke was in Davos drinking a Malibu and Rum.  Will he make it to his treehouse to raise rates in time?  Stay tuned.....

Sudden Debt's picture

After you post, I've decided to make myself a good drink to :)

I'm a real fan of brown Habbana Rum :)

EscapeKey's picture

So, is this the end of the beginning, or the beginning of the end?

something fishy's picture

Even without a concerted effort by TPTB to revive the dollar, the 'flight to safety' trade spurred by escalating geopolitical tensions could be enough of a market driver to push USD higher going forward. If things get bad enough I would think this trade could override interest rate differentials in determining s/t USD direction.

Sudden Debt's picture

The only reason why I think the dollar could go up is when social unrest spikes even more.

Once a country destablizes, they abandon their own currency in the street because of the bad economic forecasts for that country.

Plenty of countries that are now going to go to the dollar...

at least... it might also be the euro and in that case the dollar will get hughe pressure.


Mr Lennon Hendrix's picture

What if people go to, [gasp] gold!

Drag Racer's picture

so true. Ben is a genious for preparing in advance with the printing ramp up. What vision in seeing this future high demand for the dollar... or it could of just been the snow.

topcallingtroll's picture

thanks for showing me one person who has a kind word to say about the dollar and implicitly treasuries.  I have been a lone troll, crying out in the wilderness..."Watch out for the deflation scare and dollar/treasury turning point!"  I don't have the tranny balls to go long treasuries, which is of course  a sure sign they are about to rally again.

In the race between the core and gdp we need the inflationary flames doused a bit.  Fear is a good dowser of inflationary pressure as people run to the dollar again.  Mrs. Rosy Scenario says fear is building, the canal won't be closed, Saudi Arabia will turn the spigots wide open for a while, and Timmah and Berskanke have a little extra time to get GDP going.  We may yet muddle through this mess yet.

unununium's picture

Make sure you discount GDP by the shadowstats CPI before throwing your victory party.

samslaught's picture

GDP is a manipulated statistic and no longer reflects anything of importance.  Your a lone troll because you don't understand that the terms deflation and inflation are abreviated terms for two events that are happening at the same time.  What you have is PRICE deflation and MONETARY inflation.  End result = bad 

ZeroPower's picture

Totally agree, a high USD is in the interest of many parties - not to mention its irreplaceable world reserve currency title.

China won't let the USD drop further as it holds the majority of reserves. The ECB wont allow the USD to rise much as a weak EUR is key to letting the EU members sort out their shit. And finally the US can manage fine with a slightly stronger USD than before the crisis as long as tech innovation similar to what was occuring around WWII comes back.


High Plains Drifter's picture

Geez, maybe we should put in a call to Sprott.

Lets Hang Parliament's picture

The question is do we take out a put or a call on Sprott? A flight to safety normally means a put on the PMs but lets hope the market takes its lead from the ex pres of Tunisia who has gone seriously long and taken delivery into the bargain!

Real Estate Geek's picture

. . . as long as tech innovation similar to what was occuring around WWII comes back.

Let's see, tech innovation back then included jet aircraft, computers, radar, nuclear weapons, ballistic missiles, etc.  That's a rather high bar to clear.  Unless of course we have WWIII.

Caviar Emptor's picture

Here's the caveat: Stronger dollar here is also stronger everywhere. Global dollar reserves in foreign hands are astronomical. That won't satiate the thirst for food, energy, industrial raw materials. Instead a strong dollar move is a signal to stockpile, just like in 2008-9. And the leetle leetle problem of peaked out commodities and natural resource depletion isn't changing. Have you tried buying Atlantic cod lately? Nor is geopolitical tension likely to make a turnaround to the calm old days when such things weren't an issue

topcallingtroll's picture

that san francisco white sturgeon caviar is really good.  It beats all the other farmed caviar and all that shit that marrisol or however you spell them puts out from the polluted caspian sea and its non russian tributaries.  I tried all of the farmed caviars, except China.  I don't like melamine and heavy metal pollutants in my fish eggs.  The USA brand of farmed white sturgeon caviar is the best, and at fifty an ounce is a deal.  You can eat your caviar and not feel guilty that you are causing the extinction of the various sturgeons in the wild, and it is made in the good ole USA

eddiebe's picture

All speculation, of course, still your take on it makes more sense. The $ rally in my opinion is very short term. I think the 30 year treasury bull is getting very long in the tooth and is (along with the dollar) heading down. By design of course.

SDRII's picture

More short termism writ large. All tactics no strategy. When you say world is aghast at what is happening in egypt seems the events in the middle east - lebanon and egypt - this week are boomeranging on bernanke and the usa. Panetta got his drone base in yemen already and sudan looks like the next flare up (china, us proxy fight).

Bernanke from the old book - doesn't believe in resurrection. The psuedo science strong dollar rubin era architecture is a rotting corps and all the jawboning even margin rate hikes doesn't change a thing. Rearranging the deck chairs....

Ras Bongo's picture

Flight to safety in 3...2...1...

High Plains Drifter's picture

But, but , but, a stronger dollar will mean a slide in the equity markets, no?  Not to mention who how will genitle Ben make all of those trillions in debt disappear? 

Caviar Emptor's picture

It's magic! He can make the market rise even if the US is nuked. And he would do it too!

CrashisOptimistic's picture

They can flail about with the dollar or gold or anything they want.

There is no answer for oil production that cannot grow at a rate req'd to support economic growth.  You can't print oil.

High Plains Drifter's picture

Sir, we have enough oil in the lower 48 to power this country for hundreds of years. Please don't believe that silly "we are running out of " oil argument.

topcallingtroll's picture

oh my god.  An oil cornucopian!  Enough oil for hundreds of years?  In the lower 48?  Yeah if you can dig out that shale in the Bakken and heat it up till all the oily substrates dribble out.  And that will cost us how much?  Do you have an estimate of capital costs or is this pie in the sky?  I look forward to your link.  I can also give you all the oil you want at 500 dollars a barrel.  I hope your link includes capital costs or it is just a pipe dream.

topcallingtroll's picture

by the way I didn't junk you.  I think Jw is out lurking again to have a little fun.  I'm on to you JW!

snowball777's picture

20M/day * 365 * 100 == 730 billion barrels (assuming ZERO growth, which is beyond ludicrous).

Proven reserve estimates in 2006: 21 billion barrels.

You think you can find the other 709 billion in the lower 48?

Smoke some more crack.

eddiebe's picture

Balls! the mind is a fantastic thing !white becomes black magically.

max2205's picture

Would this be rinse OR repeat?

equity_momo's picture

The problem is that there does not appear to be a market driver for USD strength


Oh really? How about the same driver that we saw in 2008? You know , deleveraging and paying down debt.

topcallingtroll's picture

This is exactly the point I have been trying to get across recently.  We don't know how big this deflation monster is.  I think it is really really really huge.  In the end we may end up spending twice as much on food but half as much on housing.  That would put us back at even.  We just have no way of knowing how this will play out.  All the people assuming inflation  don't have a good measure of how large the deflation monster is either.  A hint came out recently in the estimate of the world needing 100 trillion in credit to sustain growth over the next decade.  If we are close to the zero bound then that string is becoming awfully limp and it is hard to push on it.  Qe2 may be just a drop of piss in the shithouse.  It may not even be noticeable.  Deflation is a very different beast than inflation.  It is very difficult to stop.  We may not be able to stop it even if we print up a trillion or more a year in free money.   Out of fear the rest of the world may start hording more of our paper and we get all sorts of electronic gizmos, cheese curls, and cheap lap dances from Asian babes when we go overseas, and all we are trading for it are little pieces of paper that they don't spend but horde and convert to treasuries.  It's a great deal if it can last, and it may last a lot longer than we think.  We just got to keep the rest of the world scared.  Hehehehe.

High Plains Drifter's picture

Hey look fellas. Its a deflationista. Haven't seen one of them in a while. Is that you Douchinger?

High Plains Drifter's picture

oh my gosh, oh my gosh, Deflation is coming , deflation is coming. Oh my gosh, oh my gosh, we have oil shortages.  Oh we are in big trouble now......:)

ZeroPower's picture

Actually, i enjoy the deflation posts as it brings a fresh perspective and isnt the same old 'USD WILL BE WORTH EXACTLY ZERO' argument.

Re deflation, i think it *might* be possible we will headfake into inflation as we are doing now and then dive into the abyss of deflation. Assuming the Bernank doesnt have any tricks up his sleeve.

bigargon's picture

nah..none of the above (or all of the above) Stagflation. we're going to party like it 1979.

Silversinner's picture

It will be worse this time.

East will have rising prices and rising wages(summer)

West will have rising prices with equal wages at best(winter)

Both seasons very bullish for gold.

eddiebe's picture

Problem is: Debt deflation is not the same as commodities or equities deflation.

 Bernanke does not have a printing press to press more oil for example. Deflate the price of wheat enough and people will starve. (See riots.)

Then there is the dollar chart going back to 1917.Hardly looks like deflation to me.

 The dollar and to some extent treasuries are like a transmission that is starting to fail. At first it slips a bit and then more and more til no matter how much you rev the motor ( printing press ) the power just will not drive the vehicle.

Sudden Debt's picture

Tyler, did you see the Euro news where the treasuries are now proposing that the independent pension funds and the saving of their inhabitants should be used to buy government bonds?

they want this because of the fact that demand for their bonds isn't predictable enough and THAT IS THE REASON WHY THEIR INTEREST RATES GO UP...

I couldn't watch it anymore after that because it made me sick, but if that's what they show to the lemmings, it only takes so much so they will follow that advice.