Rabobank: "We Warned The Dollar Would Go Up, Up, Up – And Then Up. Well... Here We Are"

Submitted by Michael Every of Rabobank

Dollar Kebab

We have repeatedly warned in recent years that systemic crises would re-emerge because the global economy was so unbalanced, so unequal, and based so much on so much USD debt in so many places; and that when they did, USD would go up, up, up – and then up. Nothing else, no-one else would be able to replace it, or to stand in the way of that armour-plated steamroller. Of course, it was always impossible to say exactly when the crises would occur – it was just inevitable that something, at some point, would trigger it.

Well, here we are.

As I type, AUD/USD is trading at 0.5574, down from 0.70 at the start of the year and a 17-year low; NZD/USD is at 0.5548, down from 0.6740 and an 11-year low; USD/THB is at 32.68, down from 29.7; USD/MYR is at 4.40, down from 4.09; USD/INR is at 74.95, down from 71.38; and USD/IDR is at 15,135, down from 13,866. Oh, and a more global EM FX benchmark, USD/MXN is at 24.35, down from 19!

Even USD/CNY is at 7.11, down from 6.96 – and if you think China is going to be able to hold it currency peg when the USD is on a rampage like this, you are wrong. If you think it can, please explain how an economy that relies on a bottom layer of USD to prop up its tottering debt pyramid; which is faces a world where nobody will buy its exports as demand collapses just as local supply comes back on line to some extent; which is now suddenly 10%-plus more expensive vs. neighbours that were already poaching parts of its industrial base; and where the political atmosphere between Washington DC and Beijing continues to deteriorate does not ultimately go the same way.

“But it’s a reserve currency!” some might say. China is certainly saying it. Indeed, in yesterday’s Global Times there was a threat that “Weaker dollar may lead China to dump US Treasuries.” Who says the Chinese media don’t have a sense of humour? The same treasuries that, while hugely volatile, have soared in value? The same treasuries that selling will involve the PBOC contracting its balance sheet? The same USD that China is desperately short of, and which is currently ‘weakening’ oh so much?

Meanwhile, actual reserve currencies are behaving like EM FX. GBP/USD, for example, is currently under 1.15 having started 2020 at 1.3257 - and we haven’t even mentioned Brexit. That is a 35-year low. USD/CAD is at 1.4619, down from 1.2990 – even though crude is up slightly today. Even more tellingly, USD/JPY is at 108.91, which is where we started the year – despite the fact that risk could not really be more off. Likewise, USD/CHF is at 0.9685 vs. 0.9666 – no safe haven evident then vs. the greenback.

What of EUR/USD, as the ECB announces an emergency EUR750bn expansion of QE--literally pandemic bond buying--to last until this crisis is over? Well, it is at 1.0898,down from 1.1213, which somewhat amazingly given how deeply the virus is hitting the now locked-down economy makes it a star performer, relatively. Which also means, of course, that European exporters who already have fewer customers to export to, if they can physically export at all, are now much more expensive to boot: the Aussie cheese in Thai supermarkets is going to be a lot cheaper than the French, as just one example of many.

Overall, staying with food analogies, the USD is shoving a sharp spike through all other FX: it’s a Dollar Kebab; and, just like the real thing, it can either be delicious or give you heartburn, depending on if your timing was right.

As we continue to be buffeted by COVID-19, and the global recession and financial storm that is has triggered, what else to report?

In Australia, the RBA cut rates again to 0.25%, even as the most ridiculous jobs number of all time (up 26.7K, and unemployment down from 5.2% to 5.1%, hit the screens), reaching the terminal zero-bound OCR floor. It made clear that rates won’t rise again until Australia is making moves back towards full employment and that inflation will be sustainably in the 2-3% range. Who knew the RBA could speak Japanese? Indeed, Governor Lowe has just said he expects rates to remain where they are for “some years”: I thought the virus was supposed to be over in months?

Moreover, and more Japanese, the Bank has introduced a target for 3-year bond yields of 0.25%, meaning we also have yield curve control in place, to be managed by RBA government bond purchases – or QE, albeit buying from the secondary market at the short end of the curve to pretend that it isn’t. The long end of the curve is also likely to have to be addressed soon, however, given whipsaw action there – although let’s wait for the dust to settle, as 10-years have been sold most everywhere in the last few days as everyone moves to cash – and to the USD.

There was also an AUD90bn term funding facility for Aussie banks to support SMEs; Aussie lenders will effectively get AUD1 of RBA funding for each new AUD1 of new lending, and AUD5 for each new AUD1 of lending to SMEs. The Reserve Bank will also be encouraging banks to draw from its term deposit facility, despite the stigma; and we will get AUD15bn of RMBS purchases from small banks and non-bank lenders. How long until that particular part of the package goes up and up and up – and what will it mean for that Dollar Kebab when it does?

Elsewhere, a staggering 475 Italians died yesterday; more borders are closing today – now Australia and New Zealand too, with the former suggesting it could be for six months; British schools are closed indefinitely; 10,000 troops are to join the UK’s COVID-19 support force, doubling it to the kind of force that could actually take over a small country; and up to 40 London tube stations are to close, with rumours of a total citywide lockdown.

In terms of the fiscal response: watch this space. The US has passed a USD100bn fiscal package to expand Medicaid and unemployment benefits, mandate paid sick leave, and childcare for some employees, as well as free virus testing for all; and work continues on a large USD1.2 trillion package that includes two months of UDS1,000 handouts at a cost of USD500bn. Australia is going to do more fiscally too. Everyone is going to do more.

And the USD is going to keep doing more, it would seem.