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The Implications of a Dollar Squeeze on Foreign Banks' Credit Access
Damien Cluesix's Global Tactical Asset Allocation currency piece, published on Zero Hedge today, included an interesting correlation relating to the impact of dollar liquidity in global credit markets.
On page 9 of the piece, there is a chart presenting outstanding foreign financial CP against an inverted Dollar Index. I have re-generated my own version of the chart below, using the Fed's graphical format and graph generator.
There is a striking inverse correlation to commercial paper outstanding in foreign financials and the dollar's trade-weighted value. The sharp contraction of CP outstanding during fall 2008's liquidity crunch correlated with a spike in the USD, and the correlation continued during the bounce back of credit markets since spring 2009, with the dollar tanking in the same timeframe.
The implication is that the Federal Reserve's dollar-debasing actions, through various stimuli, quantitative easing, and liquidity swaps, have extended dollar liquidity globally and have unfrozen credit access to foreign firms, with a particularly striking correlation with foreign financials' CP outstanding.
The significance of the USD to global financial markets and economies is very striking and indicates a global macro environment almost entirely dependent on dollar liquidity and USD fluctuations (and consequently, dependent on the actions of Ben Bernanke). As Cluesix states:
Foreign financial companies have continued their trend toward heavier borrowing of USD on the US commercial paper market. Could they get squeezed as in 2008?
And do not forget, has we said in September that we have seen a proliferation of debt issued in USD (Germany, Spain, etc) the rationale being that not only do we have to pay lower interest but as the USD is doomed to fall it will cost less to pay the principal. Well they might have a nasty surprise.
Should the dollar get squeezed, as I see happening, foreign banks should lose vital short-term credit access. The politicization of financials globally and the reflexivity pervasive in the global financial and economic systems make this an alarming implication. Another global liquidity crisis, though probably smaller in magnitude and shorter in duration thanks to trigger-happy reactionary policy globally from central banks, could be at hand, should the dollar gain strength in coming months.
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Any idea as to why it makes such a big difference if you take the seasonally adjusted series for foreign commercial paper or not? FFINCPN looks different.
Now this is the kinda info I like! How little the world ex-USA has learned in the past year or so. Still drinking at the open bar when the last taxi home is leaving (left)?
Great article. So, if there is a dollar squeeze, we can expect aggressive liquidity action from Bernanke. He may be able to put out this fire, but in doing so, will those extraordinary measures cause the dollar to go in the tank by the end of 2010?
It raises another good question: exactly what magnitude of a response is required to save foreign banks from a dollar squeeze? How many trillions are we talking about?
http://www.upi.com/Business_News/2009/03/15/Zlotys-collapse-stings-Polis...
http://www.ft.com/cms/s/0/22f1bd26-05db-11df-8c97-00144feabdc0.html
russians buying loonies.....
The Russians are the kings of buying at the top.
Loonies = smart long-term (that's why I opened an RBC account in Canada), but it'll be viewed as just another commodity if/when this squeeze happens. It's overvalued by at least 5 cents right now.
yes, but the last time there was a USD surge was after Lehamn in Aug 2008 and Bernanke and Wall Street's Plunge Protection teams were still not selling dollar. Having come so far and printed $1.5tr, its hard to think he would not print another $160b to satisfy these foreign banks and avert another crisis, non? ($160b being the recent peak of $260b to the recent trough of $100b after Lehman crashed). Non issue in my views.
Bingo
This is what the markets are not yet understanding.
New cash is not being created. So, basically, the entire apparatus of rents and bonds and debt obligations comes crashing down.
Short term US debt is the safest place to be ... until it isn't.
The politicos want to stretch the deflationary collapse over 20 years. What they're going to get instead is a shocking <2 year adjustment that sends asset markets back to pre-1980 levels - and hundreds of millions of people worldwide demanding to know "where the F* did all the money go?"
Unfortunately, that money is gone. Poof. Much of it spent on cocaine and strippers and condos in the Cayman and Channel Islands I suspect.
Imagine the faces on owners of mutual funds and whole life insurance policies and annuities when they're told "sorry folks, you got tricked fair and square - and now its time to move on. Now bugger off ... "
Can I come back in my next life as a stripper with a condo in the Caymans and plenty of coke? Seems like, with that package, you would have the connections to run things pretty much the way you wanted to, if you had a brain as well.
THE DOLLAR WEEKLY CHART IS GIVING BULLISH SIGNALS.
My previous bearish warnings for stocks is now confirmed.
My previous USD bull and EURO bear warnings are also confirmed.
UPDATES:
http://www.zerohedge.com/forum/market-outlook-0
In early 2007 I warned of an impending stockmarket crash.
I confirmed a bottom by early April 2009.
In mid 2009 I warned of an impending USD rally.
The uptrend since March 2009 has been a bear market rally contained within a much larger bear cycle that started in 2000.