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Kit Juckes: The USA's gentlemen's agreement with Japan and China is coming to an end
Looks like it's time to start looking for somewhere else to peddle those Treasuries -- but then, when hasn't it been? Soc Gen's FX head Kit Juckes:
A cosy relationship has formed over the years whereby the resistance to allow currencies to appreciate too much in Japan and China has fuelled appetite for US assets, which in turn has allowed the US to run a huge deficit (with gradually falling Treasury yields). This is changing, and not (yet) in a good way.
Here are the current account balances he is referring to. Japan and China's combined current account has deteriorated significantly over the last few years and continues to head lower:
Also, why risk-on/risk-off will continue to be the norm:
Capital flows don't match up to current account flows -- and don't need to -- but since the global recession, the decline in the US deficit has mirrored the fall in the China/Japan surplus. The "big story" hasn't been on that side of the equation, but rather, about the increased flow of capital out of the US in response to seriously unattractive domestic yields, and the periodic breaks in that outflow that trigger dollar strength and 'risk off' moments across asset markets. The chart below shows the lurch back into capital repatriation into the US in 2008/2009, but other than that, it?s been a very one-way flow.
As Tyler Durden noted earlier, "the truth is that in this new normal only beta matters (the more lever the better), and the only beta that matters is that generated by relative USD strength/weakness." Observe:

Juckes sees the eurozone (Germany) presiding over the largest surplus provided the euro "escapes the weight of the threat to its existence," and reduced import demand due to austerity in many of the EMU countries running deficits will contribute. He concludes:
The image that comes to mind is of a puzzle where the pieces no longer fit easily together. In the end they will, but the way that happens will affect asset prices. The big price-insensitive buyers of dollars will be less important. That won't move US yields up much while rates are zero and QE (whether sterilised or not) is taking place. But Treasury yields are at the end of their 30-year bull market. As long as rates are anchored by the Fed and the US is running a large deficit without automatic demand for US assets from China and Japan, it isn't helpful for the dollar ... And sadly, the 'risk on-risk off' gyration will go on as US investors seek positive real returns where they can.
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Can you please show me where the risk off is? i haven't seen its face in months
Positive real returns will continue to come mainly from the third world on a risk adjusted basis in my opinion.
Thats where a majority of my money is.
what is the big deal. The Fed wants to be the only buyer of sovereign bonds. The Fed wants to own everything. Same as it ever was.
How is Japan and China going to artificially supress their currencies if they don't buy our bonds?
Don't get caught holding the T-Bag.
The race is on to see which is junkier: goods from China or Bonds from America. Frankly, I think bonds last longer. Most of the stuff I buy from China dies in the hopping basket or blows out in a few months. Bonds at least slowly fade away with the dollar.
"I tell you Guntar it is time to take the dog to the vet and have him put down.
But I love Euro so much. He's been so good to us.
If you wait, he'll be in too much pain to move and will snap at you if you try to move him. He'll be lying in his own feces and urine and everybody will be miserable. Then you'll have to shoot him in the head to put him out of his misery and you'll have a body to dispose of and a nasty mess to clean up. Don't expcet me to help after I've warned you."
Yup, that's right! Things will improve unless they don't.
Is the US current account deficit going to increase? (Yes, we import 11 million barrels of $120 crude oil per day).
Is the Japan/China current account deficit going to increase? (Yes, because they use dollars to import fuel, the US deficit actually hurts them ... which is a reason the Chinese economy is having the bends right now, constrained dollar flows to China.)
Which current account is going to increase? (Oil producers. Car makers are going to take this one in the neck.)
Buy, sell, sell, buy, sell, buy, buy, buy, sell, buy, buy, buy, buy, sell, sell ...
Oh how pathetic is the market when looked to for any meaning whatsoever.
The funds will not flow into USTs unless the American Consumer keeps buying. Theoretically he / she should not be, but the Import data and China in particular seem to still belie theory. Where are the Chinese going to put those USDs ? In USTs. Until the Consumer (or a trade war) says, "Basta!"