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USD Strength: A Rally Is Shaping Up
Submitted by Nic Lenoir of ICAP
Despite continued discussions about fundamental USD weakness, and the fine job the government is doing devaluating our currency, I can't help but seeing reasons to buy the USD.
My view does not rely on contradicting the thinking according to which excess liquidity and unbalanced budgets for the government and the consumer lead to weaker currency. But I think that the amount of currency being "retired" with debt not being rolled and the velocity being null is partly countering the excessive printing. Also, one need also to keep in mind that when it comes to currencies all is relative, and while the Fed and the Treasury department are certainly not acting with a strong USD in mind these days, other countries have embarked on a similar path. Last but certainly not least, almost everybody is short USD.
Investors are long commodities as a placement AGAINST the value of the USD, and banks and governments around the world borrow in USD. Germany and Austria have recently issued debt that is USD denominated, and they were soon immitated by... Venezuela. That to me is a sign the short-USD trade is ripe for a reversal, when basically even the biggest idiot in the house is short. The ultimate pain trade would certainly be renewed USD strength. Maybe if it happens the Fed will have the pleasure this time of bailing Venezuela with cross-currency swaps.
Having said all this I have been pointing out a turn when the EURUSD started trading above 1.47. We now have some very interesting elements graphically that confirm a turn may be in the works. Weekly charts for the EURUSD and AUDUSD show how the market has come back to test the former bullish support as resistance, and so far has failed to reintegrate the channel. GBPUSD has triggered a bearish H&S and a pull-back towards 1.615/1.618 should be sold. Finally, USDJPY is posting today a bullish hammer on an intermediate bullish support, which adovcates for a correction towards at least 92.50. We will keep an eye on many other crosses as the situation evolves, but it seems technical indicators are starting to show a turn is a very real possibility. Beware, because the number of people short USD out there is huge, and if the dollar index's strength accelerates we could see a lot of stomping around the exit doors...
Good luck trading,
Nic
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With all due respect, many of you have called for the end of the Sell USD phase for a while now, and it's not come to light. It could be a while before you're right.
I think we'll know in about two weeks when the FRB ceases the treasury purchases. Removal of monetization with the added bonus of extending that fractionally will end along too; the expansion of M2 stopped in June and has since been in modest contraction.
Already you can see it reflected in commodity prices, find one commodity that is higher now than it was when the FOMC convened. Additionally you see lower UST yeilds and equities are starting to respond to the fact the fundamentals aren't supporting the rally. Two months ago negative news would be brushed off and we would witness a 3 digit gain, last week when negative news was released there was a negative response. It will take more news and another two weeks to know for sure, but I certainly think we're closing in on an inflection point.
War people. Today's market action signals war. Obama makes his first aggressive statement towards Iran. Oil goes up. Market goes up. Dollar strengthens. Economy failing? War may come to be perceived as the source of "saving" the economy. Good for the dollar. A surprise to the 90%+ of people short the dollar.
It is very unlikely that Treasury purchases will end this year or well into the next. We may or may not know for sure in the next two weeks.
The Fed has lied before and will again. First principles. Bernanke is a discredited "scientist" hemmed in by mobsters. He's all crisis-thinking in the present, certainly not thinking about future implications; nor does he care if some taxpayers get broken to make the omelet.
If he can't set interest rates negative, which his beloved Taylor rule dictates, he'll do QE. Under the radar yes, but it is going to continue in a big way.
Also, it's really too late to stop the printing now and avoid an unpredictable, possibly catastrophic event in Treasuries. Let alone everything else going up in flames. So he won't stop.
I suppose the dollar could go e^X. But I see no mechanism to explain it because there is no place for letting nature take its course in a planned economy. Their hand may be weaker, but they are still in control.
Back last year while all this was unraveling, and Uncle Ben and Hank were begging for bailout dollars, Ben made the statement that the bailout and the Feds alphabet progams would work and we could get through the crisis if "political leaders have the will".
One wonders what he meant by "will". The will for politicians to allow money printing ad infinitum? Or the will to make politcally tough decisions while the Fed was buying time with the economy?
What ever was meant, our political leaders have decided-- for better or worse-- to kick the can down the road and assume the financial systems' mistakes.
This approach historically has not tended to end very well. Or very soon, for that matter.
What if "they" watch/let the dollar strengthen, killing the shorts and getting people long and then they "apply" maximum pain through a 60% dollar devaluation, wiping out the nominal gains in the S&P 500 and reducing the national debt load in the process... screws just about everyone (accept maybe metals). Isn't debasement wonderful? Just thinkin'...
Ivanovich, What are you talking about dude? Who is this "many" you speak of.
Maybe 1% above 23 Sep 2009 lows is a start,
and 9% above March 2008 lows a clue...
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493
All I see is the pre G20 fakeout. As long as EUR and Gold stay correlated and rising, $ is dead meat. Yes, there is a possibility of a drop to ~966 and ~1.44 but those would be lifetime buying opportunities watching the failherd at White House, Treasury and Fed. Also watch AUDUSD, it is overbought right now but there is a lot of breathing space above that .88 And compare daily EURJPY and USDJPY YTD, one bearish one bullish/ranging and we know which one is which.
There was a farmer who harvested his field of corn. He sold all but 100 bushels. A few weeks later, he lent the 100 bushels of corn he had saved to a cereal maker, who gave the farmer an IOU that said “100 bushels of corn,” made a big box of corn flakes, and sold it. The next year, a famine struck. People looked hopefully at the farmer, seeing the note that said he had 100 bushels of corn. All that corn, just sitting on the sidelines! If only the farmer would put that corn on the sidelines to work, they thought, then everything would be fine...
One of the hurdles in thinking properly about the financial markets is to understand the idea of “equilibrium” – that all securities issued must be held; that savings must equal investment; that every share bought by someone must be sold by someone else.
… and that there's no such thing as “idle cash on the sidelines.”
Nice.
You are referring to the zero sum equilibrium. You are forgetting that the game does not have to be the zero sum game. Since the value of the securities held on the market place varies, it is possible to have idle cash on sidelines.
So far, post-FOMC trading seems to have been some kind of low for USD... Stock and commodity bulls need for that low to be broken otherwise the sustainability of the weak-dollar-liquidity rally comes into question.
Yeah... I don't get it... What is the premise of USD strength other than another short term panic? And subsequent panics would surely yield diminishing dollar bounces. Disclosure - I'm 50-50 gold / USD right now.
Maybe if it happens the Fed will have the pleasure this time of bailing Venezuela with cross-currency swaps.
ME-Can someone please explain what are cross currency swaps?
Also, why did the FED engage in currency swaps with other Central Banks during the height of the crisis?
Was this to create stability for the dollar and the global economy?
"why did the FED engage in currency swaps..."
In short, when a country has financial/economic problems investors and everybody else try to avoid the devaluation of the local currency by swaping into something else. What is the most liquid instrument you can buy? Dollar cash and other dollar denominated instruments (not gold, not euro, not yen, ...). What if there is not enough dollars available? -> Local currency collapses, relative to the dollar, creating a bigger local problem. What is one possible solution? The Fed (or other CB) provides a line o "credit" by the way of swaps so there is enough dollars to avoid that monetary run, which could be pure speculation mind you.
"Was this to create stability for the dollar and the global economy?"
Yes, it was to create stability but for less stable economies and save a possible tailspin of the global economy into the ground, by way of monetary meltdown.
Chris Martenson has an interesting theory that the currency swaps were to provide strength to the dollar (to prevent a dollar collapse):
Here we might note that the startling run of dollar strength that caught so many investors off guard (but not Goldman Sachs or JP Morgan, it should be noted) began just in front the steep, half-trillion US dollar currency swap operation that began in earnest in fall of 2008.
Note also that the double top in the USD and its subsequent slide all line up nicely with the swaps additions and withdrawals. Correlation is not causation, but this is a pretty cozy relationship, and it possibly explains one of the more unusual periods of dollar strengthening in recent history.
http://www.chrismartenson.com/blog/currency-swaps-dollar-and-tilted-play...
Further speculation:
Regarding the currency impact of the swaps, you are only looking at it from one direction. To turn your example around, what if the US used it's hoard of swapped Euros to sell into the Forex markets while the Europeans used theirs to provide to institutions that had debts with US dollar claims against them?
In this circumstance, the US dollars are being 'extinguished' in the service of debts, so no increase in USD supply, and no consequent downwards pressure on the dollar.
Meanwhile there are lots of Euros now flooding the market and so the USD would rise, especially against the Euro and that fits the data from that period perfectly.
One way or the other, the correlation between the swaps and the USD index is there, I am only trying to understand why and what it might mean.
At the time of the surprise dollar strengthening, Paulson, et al., were on record saying that the high price of oil wasn't helping anything and they were deeply concerned about deteriorating conditions in the largest banks. A quick move in the dollar would have accomplished much; it would help repair the balance sheets of many a large bank who were happily positioned in long dollar/short commodity trades (against their hated competitors, the hedge funds), drive down the price of oil at a critical time for consumers, keep US interest rates low and demand for US Treasury paper high.
All at a critical time. This is precisely what happened.
While this could have all been a gigantic series of happy, free-market coincidences, I absolutely do not think this is the case.
Might be a short-term rally, but it seems like the 200+ year trend of dollar-destruction is will continue soon enough. Even accelerate over the next 5 years.
100 year trend. The dollar actually doubled in value after Jackson killed the bank just because they had a hard time keeping enough dollars in circulation with the booming population.
Makes sense.... IMF threatens to 'release gold reserves'.... gold sinks, dollar climbs.
All in an effort to keep people in the dollar.... we'll see how long this lasts.
Sometimes your last ditch effort wins you the battle. Markets got so complex with the introduction of AI the "economists" can only guess and pray. People tend to listen to confident sounding idiots, but the markets still do whatever they feel like.
"Wins the Battle", LOL?
So, the IMF sells gold, thereby diminishing its power to interfere in the market, and this "Wins the Battle" allowing the printing of Fiat currency to continue with no loss of purchasing power into the foreseeable future? Sounds like something from a CNBC after school special.
"win the battle, lose the war"....
Know your enemy and in a 100 battles you will never be at risk.
i have sensed a strange firmness in the dollar over the past week suggestive of a rally....not sure that it is sustainable for more than 4-6 weeks but i agree with the poster who saw a link to the gold selling by the imf....
i still think that 6-12 months out the dollar is on the down side...
I'm expecting a "next leg down" equity crash in support of Treasuries, and have been for some time. Why? Because in the short term it solves more problems than it creates. If anyone wants me to list them, I'd be delighted. To the people with their fingers on the buttons, no other reason is required.
Strong hands on PM's is all that matters.
I'd like you to be delighted. If you wouldn't mind listing your rationale behind the "next leg down" equity crash, I'd be greatly interested. Thanks in advance.
BB
PM in his disguise.
·
The entire global political / economic system is based on a strong dollar.
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The status quo is totally committed to and invested in the dollar regime and U.S. policy commitments abroad.
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The status quo owns the U.S. political system and controls Fed policy.
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A strong dollar means U.S. sovereign borrowing rates will be lower, delaying (for awhile) triggering the U.S. sovereign debt trap.
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The USD is the traditional safe haven currency, whether justified or not. Panicked people run home to momma.
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A stock market crash will scare dollars into the "safety" of U.S. Treasuries.
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The pace of QE is tapering off, but the pace of U.S. borrowing is likely not, so the pressure in the treasury market continues.
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The Japanese will stop talking about Samurai bonds.
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Gold has been at or near $1000.00 for more than a few days.
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The short-dollar trade is getting crowded, so it's a good time to teach the shorts the error of their ways.
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The "Audit the Fed" bill might pass both U.S. houses soon, and a market crash can be blamed on that, giving Obama an excuse to not sign it. BTW, IMO an actual audit of the Fed would crush the USD. Immediate foreign policy impact.
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Any of a number of foreign military entanglements could be initiated to remind the world who's got the strongest military and therefore deserves to remain the strong currency.
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It worked last time: http://quotes.ino.com/chart/?s=NYBOT_DX&v=dmax
Good list.
· Any of a number of foreign military entanglements could be initiated to remind the world who's got the strongest military and therefore deserves to remain the strong currency.
Just as long as boots on the ground are not a requirement.
lollercoaster: the (re)rise of deflation-thesis.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aEHQiqgK1vdQ
Sept. 29 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he’s been buying longer maturity Treasuries in recent weeks amid a re-emergence of deflation concern.
“We’ve exchanged our mortgages for the government’s check” as the Federal Reserve winds down purchases of agency debt, Gross said in an interview from Newport Beach, California, with Bloomberg Radio.
+1
Old habits die hard.
Running back home to Momma is not a dynamic process. It's a reaction based on fear.
Good post.
what's nice is that apparently Israel is going to catch everyone off guard when they bomb the shit out of Iran if the dollar is any indication of the complacency.
I really, really don't understand why no risk premium has been building in the assets that would be flocked to when Israel attacks (or the US pre-emptively strikes, in order to avoid a holy war being declared). I just cannot see Obama giving the orders to take out Iran's nukes, but he has been leaking hints lately - and Israel has been bending over backwards to give him time to build support, which their PM has been working harder at than BO. How much longer will Israel wait? I'd put it at <2 months now.
Will BO strike first in order to avoid being the US pres who let the Iran crazies go fully nuclear? I think the market says yes right now... if Israel struck first I think you'd see such a war that oil would be > $500 in a week.
I'm morally opposed to holding Obama IOUs. So, some minor breakout in IOU strength really means nothing to me.
Then hold Bush/Cheney IOUs...
As bad as the 'Bama Budgets are, there are still plenty of Dick-"deficits-dont-matter"-Wads out there.
obama sure bought into that theory and took it
to the next step - deficits are good...and if a
little is a good a whole must be a whole lot
better....
birds of a feather
The debt is wealth discussion....
You should immediately move to Somalia. no taxes and maximum freedom. you can take Chumbawamba and his run up credit card debt\lie about it money earning policy with you. Good luck. A true RW maximize freedom man or woman of principal would leave the US for Somalia immediately.
With all doo respect. Has one of your ZH trades ever worked?
TIA.
The official Nic Lenoir contrarian club.
(he says buy and we sell)
SWRichmond:
I agree with your assessment. The US Govt has only one reason to tolerate the existence of the FED, and that is to guarantee that the Govt can ALWAYS finance it's debt at low interest rates. Otherwise, a few smart bombs can be targeted to remove the FED, and the Treasury could print all the money it wants to.
A "next leg down" scenario will scare enough people out of equities and right into T-Bills, just at the right time to make sure rates are good and low.
Vinz Klortho
"The US Govt has only one reason to tolerate the existence of the FED, and that is to guarantee that the Govt can ALWAYS finance it's debt at low interest rates."
Hogwash....if the government really wanted to finance it's
debt at low interest rates all it has to do is get rid of the Fed and go back to govern our great republic by using the US Constitution. Let Congress take back it's constitutional responsibility and take control of the
currency. Let the US Treasury do it's job and not prostitute itself to the Wall Street Banksters running the
non constitutional Fed.
If the USD carrytrade starts to unwind, sure the dollar will get stronger. Right now, there is a lot of liquidity for primaries and CB's to borrow that low interest cash and go to the craps table in commodities,oil gold etc.
But if that borrowed money gets more $$(if bonds start to go off on their own in interest rates) then all hell breaks lose. Or if the stock market takes a big dump and people need to delever-that will drive the dollar higher. The only thing keeping this dollar cheap is the low volume and free money window. There are a host of things that could make the USD go higher and frack everyone leveraging it.Then it will be an exit run like a Who concert. In fact, the extreme sentiment against it has already seen it bounce. We see BIG advances in DXY charts at certain points-signalling delevering events. Then the FED is able to pour more digital dollars out there to keep it's value and supply in check.
One has to remember that the amount of consumer/private dollars that were lost due to the implosion far outweighs any printing the FED and Treasury can pull off. the private secotr is like 12x public credit. It's not even close. So that magical FED money that supposedly is inflating everything could implode in 2 weeks. Really fast if people delever positions(like we are seeing in oil.) Just my opinion...
New Robo posting, click under "contributors" at top of page.
http://www.zerohedge.com/article/quarter-end-markup-begins-earnst#comments
I've been waiting all day for my Robo fix
I agree with the dollar reversal trade, and I've been a dollar bear for much of the past six years.
I also see the USD either gaining strength or not getting any weaker as we are still in a deep recession (as the latest durable goods numbers confirm.) Euro zone is just as bad, and China is exporting to no one as the massive mothballing of container ships confirm. All this liquidity is either just keeping the gangreen legs of the TBTF banks from stinking too bad, or blowing tiny asset bubbles against a massive wave of deflation.
Nothing that caused this collapse has ever been fixed, just kicked down the road to buy time for a hope of re-inflation.
Stay tuned for part 2..
Man, I loved that calculator.
Venezuela shorting(issuing $USD bonds) the dollar? Wow, where do I sign up for the other side of THAT trade? Do I smell 'default' down the road?
On the political side of things it looks like there will be
a significant effort to stop or de-rail the upcoming vote
on raising the debt ceiling. That vote is the magic bean.
If they are able to stop that it breaks everything else the
bad boys are trying to do. Another possible explanation
for dollar strength.
I'm telling Hugo that you called him an idiot. Watch your step buster!
On this very subject, some of you might be interested in Chris Martenson's latest at SA, tying the behavior of the dollar to currency default swaps. Compelling, I think. Then he takes some swipes at GS and JPM for fun:
http://seekingalpha.com/article/163750-currency-swaps-u-s-dollar-and-a-t...
excelent article with nice explanation on how
currency swaps work....
so if the swaps are essentially unwound, then we
can expect the dollar to either rise because
downward pressure is abating, or we can expect
it to continue to descend because artificial
forces from the swaps is vanishing leaving it
to resume the course it was following prior to
the implementation of the swaps in 2008....
so it is important to know the swap activity to
understand the ebb and tide of the dollar. spend-o-
mania and qe are not the only factors.
21 days will bring the dollar strength/reversal few are prepared to comprehend. that leaves 3 weeks to sell risky assets. the risk trade is toast in the short term - that includes gold and energy (until the iran conflict goes hot).
Actually it's 14 days from today till October 12th. But you were close.
Be prepared.
http://www.zerohedge.com/article/time-jpm-spy-desk-remind-market-who-cha...
This "October 12" foolishness has got to end. Everyone here understands the potential for imminent systemic failure, but pegging a specific day without justification that you're willing to disclose is unfounded and extremely annoying.
It was August 29th, then September 22nd, now October 12th. Just shut up. If you're right, I owe you a Coke.
Just a friendly reminder to my adversary. My team never claimed action for August 29th or September 22nd.
I'll take a raspberry iced tea but would prefer you to steep the tea for 10-12 minutes when you make it.
Let me get this straight. Bernanke gave a trillion dollars to 14 central banks. He will not tell us which banks he gave it to. These banks are now loaning the money out and making a profit. This guy thinks the dollar could make a reversal.
I am lost.
May the wolves not find me.
I agree
I would say that all this points to the exact opposite:the dollar will actually tank. No rational debtor is going to pay more for debt than they have to. So assuming issuers of debt are rational, I would assume that they find it cheaper to borrow in dollars than their own currencies. Therefore it's rational to assume that they assume the dollar will depreciate.
This is very evil game to play ,especially for large dollar holders such as China and Japan. They could borrow in dollars then burn lenders by selling their dollar denominated assets.
To me this really smells like a setup. I can't say where the dollar will go in the short term but if everyone is issuing debt in dollars they probably believe it's going to be worth less in the future.
Wow, check out the deflation in Japan: http://finance.yahoo.com/news/Japan-prices-tumble-at-record-apf-3221387579.html?x=0&sec=topStories&pos=main&asset=&ccode=
"Game console maker Nintendo Co. last week announced plans to slash the price of its Wii in Japan and the U.S. by 20 percent to spur sales heading into the critical holiday shopping season."
Japans deflation is spreading to the US? I hope Baxter has a shot for that? It's a global pandemic caused by the Wii.
If the powers that be in the U.S. wanted, they could create a flight to quality trade in a heartbeat.
The question is whether this would create support for the dollar or not. If there are no immediate moves to bailout the next entity, my answer is "probably".
We've hit a double bottom at 22.60 on the UUP, and are now up against resistance at 22.90, which is also hitting the 20ma. I believe we will drop one more time to form a triple bottom and then break out upward.
October 5th-7th should be a turning point for the SPX (down), and the dollar (Up... of course). This should make all of October a bad month for the market.
Red
SPX top / Dollar bottom on October 16?
Gold to $600 over 1-2 years horizon. EUR to 1.25.
There is no inflation. The double dip or collapse you all want will deflate everything and although people want physical gold, the paper price will collapse.
You're buying into hype, albeit hype from the bearish camp.
Wow. you actually believe there can be complete agreement of opinion in a group of three or more?
you can never go bad with gold especially as a long
term proposition....
but regarding deflation, that is a pure crock...
monetary inflation has been rampant and despite
the recent relaxation in the m-2 and possibly m-3
numbers, the money sitting in the fed will
become an m-3 phenomenon and casue a gush of
cpi activity to the upside...
but i will buy a certain mr gecko's analysis
that in gold terms we have a deflationary problem
but in nominal terms no....thus the euro and gold
are not going down.
Ya gold and mining stocks totally collapsed on price during the 2nd crash of great depression.
OH WAIT it TOTALLY DIDN'T.
But this time things will be different. Because we've hidden the truth better.
This is TOTALLY GOING TO WORK THIS TIME WERE NOT STUCK IN A CRAZY LOOP!!!!!
This 'oversold dollar' talk has me confused. Are we talking about mega prop traders like GS being short? The rest of the interbank crowd? Day traders who like action? Well if that is the universe then I guess the dollar could be oversold. If you are thinking of those that hedge trade flows, well they might be short as well. The corporates rarely get this right.
The dollar has two functions. It is a medium of exchange for settling cross border trade and finance. The other much more important function of the dollar is as a store of wealth.
On a short term basis the $ maybe oversold at the moment. So it can gyrate up a bit as these financial positions are offset. But folks, on a store of wealth basis the dollar has no where to go but down. The US is in a slow motion car wreck as it loses its reserve status. Everything that one hears and reads from outside of the US confirms that to me. Better yet travel a bit. I have not met anyone who does not think the US is responsible for the economic chaos of the past year. We have lost our Rep. We are not trusted any longer.
The dollar may be oversold ST. There are however $5 trillion of holders who would love to sell at at a higher price. Long term dollar strength is not in the cards.
what about central banks of countries with the net export model of economy. Will they just sit there and let their economic engines run dry? Can they afford to endure the strong dollar and dream of v - shaped recovery at the same time?
I would expect a lot of seek and hide games by various central banks (including ours) trying to devalue their own currency. Due to that fact (trade wars), I expect a lot of side movements and capitulating forex traders :)
The fun will start after Asia exporters realize, there won't be much of the usual demand for their goods in the US this year.
However if the Chinese recovery turns to be fake and European banks will have to acknowledge their real losses, there might be another risk aversion flight, hence temporary strong dollar.
Couple more weeks and maybe. Bounce to res is all that's happing now
Sorry, a follow on comment. Consider the words today from Robert Zollick President of the World Bank. If he is worried about the dollars role in the future then we all should be.... His words:
Will the U.S. dollar remain the predominant reserve currency?
The Bretton Woods currency system gave way in 1973 to floating rates, with the dollar as the world’s main reserve currency. For all the questions about the dollar’s reliability as a reserve currency, its value strengthened during the crisis as it offered investors a safe haven.
The United States is incredibly fortunate that the dollar enjoys this special status. When I work with countries struggling to pay for budgets or finance trade deficits, I reflect on how Americans do not spend a moment considering the unique advantages of being able to issue bonds and print money freely. The histories of the Napoleonic wars tell of great campaigns and battles, but the ultimate victory of Britain and its coalition depended on the dry chapter about Pitt’s restoration of Britain’s credit.
The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency. Looking forward, there will increasingly be other options to the dollar.
Given the ECB’s recent performance, there is every reason to believe that the Euro’s acceptability could grow. The influence of the Euro will depend in part upon the competitiveness of European Union countries in future years, and the depth and liquidity of its financial markets. Demographics and growth prospects will also matter. But Euro financing offers a respectable alternative if the dollar is weak.
Moreover, China is moving toward gradual internationalization of its currency. China is making it easier for trading partners to do business in Renminbi – for example, through currency swaps. We are likely to see this shift in the world of investment as well: for the first time this month, China issued sovereign bonds in Renminbi to offshore investors. China recently announced that foreign companies will be able to list their stocks in China, a step toward making Shanghai an international financial center. As a major importer of commodities, one can imagine new benchmark indices established at Shanghai or other Chinese ports, eventually in Renminbi.
Chinese leaders will be cautious. Most want to retain the control that comes from a closed capital account. Financial and banking markets are likely to continue to be subject to various tools of intervention and control. Yet I expect China will be inevitably drawn outward. Over 10 to 20 years, the Renminbi will evolve into a force in financial markets.
Countries and markets may also experiment with financings denominated in Special Drawing Rights –or SDRs— which reflect a portfolio of major currencies.
Of course, the U.S. dollar is and will remain a major currency. But the Greenback’s fortunes will depend heavily on U.S. choices. Will the United States resolve its debt problems without a resort to inflation? Can America establish long-term discipline over spending and its budget deficit? Is the country restoring a healthy financial sector capacity for innovation, liquidity, and returns, without producing the same risk of big bubbles and institutional breakdown? The dollar’s value will also depend on the extent to which we see the return of a dynamic, innovative private sector economy.
Power relations are being questioned within countries as well. Central Banks have played a huge role in this crisis.
What's going on with Serge and the Goldman code? We haven't gotten an update in awhile...
While I do have a soft spot for Prechter's view(and zero hedge stance for that matter)of deflation and strong dollar,I also have a soft spot for Jim Rogers. I always looked at economic fundementals in trying to understand what market direction things going to. And while currency strength is relative, I tend to believe that Jim Rogers knows something that we don't when he is so bearish on the dollar(after all, So many years in business,he must have a friend or two who will tell him what the plan is). So from the outset,it looks like the press is going to slow down. But do we believe that?how about 6-8% on the ten year and another run for s&p 600?except this time money managers might throw the towl and we end up at 300?And does it have to be overt?what about that billion dollar sent to a secret Swiss bank account that Allan Greyson asked about the other day?that 1 could turn into 200 just as easily. But no,not the Euro. I bet you that Greece Spain Italy are miserable because the ECB is not printing. And I would have gone long the Euro back in Mar if it wasn't for that nightmare of the Euro unravelling any moment. And for how long can Germany be the engine for Europe?what would the Euro worht without Germany?Any guess?
Since the Chinese just started selling Yuan-denominated bonds
http://news.yahoo.com/s/afp/20090928/bs_afp/chinahongkongfinancebonds_2009092807530, I'm not quite sure the U.S. Dollar will get that much of a bounce this time around.
While it's true that fund managers tend to liquidate into Treasuries during a sell-off, it could be a trap this time. They could bail into Treasuries and then get smashed there from a huge one-day devaluation. Who knows.
I've been warning about a USD rally for several months now.
My USD index long term indicator continues to give *bullish* warnings.
Is the current bear market rally ending ?
MORE:
http://www.zerohedge.com/forum/market-outlook-0
This is my thinking at the moment;
http://www.youtube.com/watch?v=FczrMTmMWEc
However we are at a crossroads. Either we bounce or test the 70x of the index and if we break game over. I think a bounce is more likely.
Spot on, Nic. Hard to see such a lopsided trade making the overwhelming majority rich... where everyone profits on inflation to pay off their McMansion debt... laughable and ironic. We aren't at the hyper-inflationary crux (in terms of generational cycles or anything else) as of yet. Oh, it is coming...just not for awhile. In the meantime, early bettors will lose big. I hear the sound of a dollar vacuum in the distance, and the media is wearing earplugs with sounds of Goldilocks optimism ringing strong.
I posted this over at Roubini's blog, but think it probably belongs here too - especially as it represents a nice neat conspiracy theory.
@ Hayes
Good to see you. I'm still not able to post a blog, but can't resist hanging with the blog buddies here in the comments.
Clearly a great deal of the easy money from QE in US, UK and EU has ended up in speculative momentum in asset markets (equities, commodities, bonds) as a new carry trade. Virtually none of it has gone to financing productive investment or increased retail/commercial lending that would promote consumption/growth in the real economy. The result is a bubble in asset prices blown up by the easy money, with no realistic basis in actual consumer, business or economic fundamentals. As a result, it is clearly unsustainable. When it will burst is anyone's guess.
I think it's a pre-meditated set up that will be burst to achieve a political agenda - just as with the Lehman failure/Reichstag Fire for the Paulson Plan looting. And I think the Fed and PBs are positioning things now to burst the bubble soon - if only to forestall the Audit the Fed Bill. The PBs are being recapitalised by coordinating actions with each other and the Fed, so that they can frontrun what they know will be seminal events in market direction.
The game here for the Fed is to export losses and import profits. The mechanism for this is margin calls on leveraged investors/leveraged markets. The reason for pumping up the asset classes globally has been to benefit from the foreknowledge of this on the upside, and the foreknowledge of this on the downside. GS and buddies will all profit handsomely. The failures and major losses will all be targeted at foreign competitors and domestic competitors so that those left standing get a larger percentage of a shrinking pie.
The power to call margin is the power to destroy. In leveraged markets, the withdrawal of leverage necessitates collapse as forced selling wipes out value. Those destroyed on the downswing lose all their assets as collateral to the creditor bank. Those assets are held and then sold on the next rally. Lather, rinse, repeat = perpetual motion profit machine for a more and more concentrated and powerful financial elite.
We no longer have market capitalism. We have state capitalism which depends on the liquidity of the central bank to drive momentum in markets and determine change in direction. The Fed is about to stop QE, withdraw liquidity through reverse repos, etc., and that will force the change in direction which will justify the PBs calling margin on all the leverage extended earlier this year. A trigger event (foreign bank failure/state or municipal government default/attack on Iran) will destabilise markets. The margin calls into the uncertain markets will force liquidations, crash global markets, destroy weaker players, and create a political opportunity to force more bad legislation and bad policy through a frightened Congress.
It worked before to expropriate taxpayers of trillions of dollars. Same again, please?
Of course, this is a conspiracy theory, but some conspiracies can be very profitable and last a long time. Control fraud is always a conspiracy by those holding power, and is always very profitable and quite low risk.
I should note that the reason for choosing this thread is the connection to US dollar revaluation. Virtually all margin under global standard derivatives, prime brokerage and securities lending agreements is in US dollar. The result of a margin call by the prime brokers and major investment banks is therefore a sudden, sharp demand for US dollars to prevent default.
Foreign assets are sold and the proceeds swapped into dollars to meet the margin call. Foreign assets and currencies crash, dollar strengthens.
Look at October 2008 for the template. Prime brokers discreetly raised margin on PB clients from an average of 15 percent to an average 35 percent. Because all PB is unreported bilateral business, there was no public announcement of this and no public record of this. All the public saw was the crash of global asset markets and a rapidly strenghtening US dollar.
the manipulation of margin is precisely what
triggered the 1929 crash....it's a tried
and trusty tool of the fed and its masters....
no crisis ever need be wasted as you note...
with cds and other derivatives in place to
succumb to a "credit event" it could easily be
used as another threat to dictate to congress
by the oligarchy....
makes sense to me...congress is in the final gasps
of death and our faux president will be there
to step into the gap....
Of course, this is a conspiracy theory
Doesn't make it any less true. Like you say, it (margin calls) has worked in the past and will work again. I'm a little sorry I haven't run across your posts previously, as your comments here mirror what I have been thinking and saying (eerily so). And I agree that an attack on Iran has the looks of the trigger event soon.
"The game here for the Fed is to export losses and import profits. The mechanism for this is margin calls on leveraged investors/leveraged markets"
It is possible that this explosion of deleveraging will happen but I dont think that is what the Fed wants.
This could create a deflationary nightmare and a deflationary spiral is what fear most banks in general and central banks in particular.
The Keynesian financial fiction is based on central banker's inflationary magic wand power. If the Fed loses its ability to grow monetary mass at will the Fed loses all its power.
You don't need a complicated overt conspiracy for this to be true, as the amount of coordination and planning would be formidable. All that is necessary is what I call "the conspiracy of like minds," where the participants all think the same way and thus it takes very few signals from a couple of central players to whom the other participants look for direction to set up the plan. The essence is frontrunning, the goal is incredible profits. The rest are details.
It is nice to think of all the complicated reasons why the dollar should go up but the simplest is that when something goes down a long way on those pretty charts it turns around and heads the other way.
I'm a believer in a long term decline of the $ and even believe we have a good chance of a currency shock at some point. The psychology and the market mechanics simply aren't in place yet. The IMF has only just started its fake currency experiment (SDR's) and China is putting out its first feelers in selling Yuan bonds but they are restricted to people who own the currency and own it in a Hong Kong bank account.
Deflation IS a reality right now regardless of monetization - any inflationary printing has headed into asset markets. Houses are still bizarrely over valued from mid market on up. If we had let market forces have their way you would be buying high end property for ten cents on the dollar right now.
Deflationary pressures will increase the dollars value. The long term outcome is a different argument
Dollar bulls take the escalator while the bears take the stairs. When there is a reversal, the whipsaw will be felt.
Inflation, Inflation, Inflation only then will we see the USD awake. But lets not forget that would mean the end of the equity rally since March 2009. 10340 and then 10580 but a sustained pullback could be on the cards prior to this. Yes thats the message here Inflation increase would force the Fed to raise. I would watch the Fed overnight rate for indications where this babys heading for the next 2 months. Also going forwards I would go long 1 week prior to CPI/PPI data being published (Mid month).
Good Luck!