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How To Trade Quantitative Tightening, According To Deutsche Bank
Last week, the world was introduced to what Deutsche Bank has branded "quantitative tightening" or, in layman’s terms, "reverse QE."
In short, what began late last year with the death of the petrodollar and culminated last month with China’s massive UST liquidation can be broadly conceptualized as the end of the great EM USD asset accumulation or, put differently, as the (black?) swan song for the era of emerging market FX reserve hoarding that has for years served as a source of liquidity for global markets and kept a bid under assets like USTs.
We - as well as Citi, SocGen, and now Deutsche Bank - have endeavored to speculate on what hundreds of billions (if not trillions) in EM FX reserve liquidation may mean for UST yields (see here, for instance), but if you’re looking for other ways to trade QT, Deutsche Bank has another idea and on that note we present the following graphs along and commentary from DB, with the caveat that one should always beware of mistaking correlation for causation.
From Deutsche Bank:
The fact that two thirds of global reserves are held in dollars means that a sell-off should be bullish USD against other reserve currencies. This is because as central banks prop up their currencies against the dollar, they also sell other reserve currencies against the USD so as to keep their FX allocations constant. Indeed, fluctuations in EUR/USD are tightly correlated with changes in global reserves (Figure 25), though this correlation naturally captures causality in both directions.
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electronic money and deflation... a whiff of Weimar in the air; whatever the three card monty of the banksta cabal.
The more they sell off UST, the stronger the dollar gets..., what am I missing?
Re-read the article. Then think. Assuming you can.
What with the global economy going pear shaped amidst severe deflation, rates are NOT going to go up.
The best bet is that we're going to see a whole lotta negative rates all over the place.
The first deflationary leg of the shit storm is not over, yet.
A long long way from it.
If QE represents the CBs creation of new currency into existence, does reverse-QE then represent the removal of this currency from existence?
If not, then is QE ever reversed at all?
Right. WhoTF is supposed to buy all these USD treasuries and with what?
Proceeds from liquidated risk
Im with Mr Peabody...how the heck does Deutsche Bank come up with selling UST because of reversal in reserves stocks is positive for USD/EUR???
First prize for anyone who can explain this....
As a note they say the Central Banks would buy USD to prop up against their local currencies...if thats the case then there is no NET FX reserve reversal...which is the whole reason they are selling UST in the first place is because of capital outflows..
The Fed?
With QE 5?
Loans created productive money, QE created unproductive money.
Loans of what?
Loans vs QE? Same principle with their measurements omitted.
Loans from existing currency are exchanged for the production of value.
Loans of new currency are exchanged for the extraction of value.
If never a new shred of currency were ever created into existence, what would happen?
Loans are debt. Debt needs the principle PLUS interest to be paid. Debt is a monstor to be feared. The FED fears it for sure.
The Great Currency War has finally started.
Yep Knuks, the liquidity comes out of risk assets first and migrates right down Exter's pyramid. There will be a time to sell Treasuries and Dollars, right about when that is all anybody owns at a profit.
Right -- was thinking the same thing while reading this. Sure, countries, SWFs and CBs will need to sell assets to stay afloat; however, they'll start with the riskiest stuff first (unless liquidity becomes a prohibiting factor)... like commodities (started), equities (starting), HY (horizon), corporates (this'll be fun), USTs/USDs (finale) and then infrastructure assets (weehaw!)... No?
This argument seems circular & so does not make sense:
"The fact that two thirds of global reserves are held in dollars means that a sell-off should be bullish USD against other reserve currencies. This is because as central banks prop up their currencies against the dollar, they also sell other reserve currencies against the USD so as to keep their FX allocations constant."
USD will still be net sold. Also who says they need to keep their FX allocations constant? Doubt they will be selling gold (whatever proportion of global reserves it comprises).
double clicked...
removed
the way i think about it (and am happy to hear if anyone thinks ive got it wrong and can enlighten me ) is that the strength that comes to the USD from CHina selling treasuries is not via a direct move, but rather an indirect, but more powerful move.
yes, as china sells UST (and usd$) for for yuan, that places negative pressure on the dollar on one hand, BUT what you have is interest rates going up in the U.S. on those treasuries as a consequence, which causes two things that counteract the otherwise negative pressure on the usd. 1) rates up does tend to support usd inflows just as a function of interest rate parity, but probably more-so b) higher us rates lead to more global and em weakness (not to mention funding costs for those who borrowed usd to fund em speculation). this creates something of a capital call, or call to come home for all those dollars as risk-off flushes cash back into the u.s. there have been articles here on ZH before that went into detail just how net short the world is of the USD as a function of all the em-investment funding thats happened in usd. as those asset markets deteriorate, the specs need to come up with usd to close the trades. while this *ultimately* ought to work itself out (and thus, allow the usd to move lower), in the near-int term, it could cause it to continue to spike higher.
All these gyrations really don't matter a lot. What truly matters is the velocity of money figure. If it keeps going down, it means we are truly fucked.
Right now, velocity of money figures are some of the lowest on record. Why are they so low? Because people are into debt up to their eyeballs and can't afford to spend much more. That is why demand destruction will continue until we start another world war to stop it.
That is the end game of the banksters, folks. So prepare for it.
Seeing those wild gyrations in FX today,how are you going to beat the algos ?
There is an enormous logic error in this DB analysis. One which would manifest itself in some truly epic muppetizing.
May we have a hint?
War...it's what's for dinner..
"How To Trade Quantitative Tightening, According To Deutsche Bank"
Step 1. Sell $35Tillion Euros in derivatives and IR Swaps.
Step. 2. Short Gold, especially on options expiry.
Step 3. Bailout or 'OMZG -tanks in the streets!'.
Step 4. Remember to email MERS mortgage spreadsheet to FED.
Oh you mean instead of PMs?
Belgium will be only buying USTs and ergo USD.