That Time The Dollar Tide Went Out…
by Tom Luongo,
ZeroHedge.com
Sun, 04/28/2019
Welcome to the Dollar Rally to end all rallies. This week’s action in the U.S. dollar puts paid all of the moves by the Fed and the ECB over the past three months to forestall this from coming.
First it was January’s FOMC meeting where the Fed completely reversed course after a very unpopular December rate hike threw equity markets into a tailspin by Christmas.
Of course our Narcissist-in-Chief thought it was all about him and implored the Fed to stop raising rates. It was interfering with his ability to shake down the world at his sanctions and tariffs party.
But it wasn’t about him at all. It was about the Fed’s need to normalize rates into a coming global slowdown after a central-bank-induced, decade-long recovery of dubious merit.
They’d done their job of recapitalizing the banks, somewhat, and now it was time to start trying to address the massive pension system and municipal bond crisis that was on the horizon.
Or at least that’s what they thought.
Moreover, at some point the Fed had to show the markets something positive. That unwinding its balance sheet alongside significant shift in capital flows thanks to Trump’s tax cuts going into effect in 2019 was a signal to U.S. corporations to invest in something other than balance sheet manipulations themselves — buybacks, special dividends, etc.
Trump can talk a good game about the ‘greatest economy evahr!’ but reality is even today’s 3.2% GDP print is marred by one-off items like an anomalous contraction of the trade deficit and huge inventory builds as Zerohedge pointed out.
Let’s not forget how easy it is to get a big GDP print when you’re running the biggest deficits in history.
So what’s the real story. Well, as always, it’s the dollar, stupid, as I said yesterday over at Money & Markets. The dollar synthetic short thanks to that decade of cheap access to them has created a monster not only in emerging markets per normal, but also in developed markets as well.
Europe. Great Britain. Japan. China.
The problem now is that both the pound and euro have broken down out of their ranges and are threatening free fall. The euro broke support at $1.12 and looks for all the world that it is headed to the 2017 low of $1.034. The pound is fairing a bit better, trading just below $1.29 with the February low of $1.277 still in play. A weekly close below that and $1.198 comes into play.
This wasn’t supposed to happen with the European Union winning the Battle of Brexit by keeping the U.K. locked into its death spiral like a peregrine falcon hanging onto a wolverine and getting torn to shreds.
So while we’ve been focused on the Turkish lira, it is the euro and pound that are the worrying ones as Europe now seems to be losing the real war, the one for investor confidence.
The dollar has broken out to the upside despite the best efforts of the Fed, Donald Trump, the ECB and every other philosopher king (and I use that term with as much derision as I can muster) the markets look to to provide guidance.
It’s not terribly complicated when you think about it. A decade of zero-bound and/or negative-bound interest rates have so thoroughly screwed up the market for dollars globally that any small shift in perceived dollar liquidity results in massive volatility.
See the chart below. It is the USDX (in Red) and the percentage of Reserves Absorbed by non-currency factors (in Black) published by the Fed weekly in its H.4.1 report. It says a lot even though the relationship presented should be fairly obvious. As the Fed has changed it’s monetary policy, the percentage of total bank reserves in the U.S. reserved and unavailable for lending has decreased.
The Rest…HERE
