US Dollar UP Or Down
Published on Selasa, 14 Januari 2014
22.41 //
Market Analysis
The US dollar is the currency traders love to hate. “Everybody knows”
that the greenback is perpetually weak, a fiat currency made for
shorting. This viewpoint is almost inevitably attached to hand-waving
notions of money printing vis a vis the Federal Reserve, how America is
going down the tubes, and so on.
But this is faulty logic and faulty economics. For one thing,
quantitative easing (QE) is not money printing. It is an
$85-billion-per-month asset swap, in which one form of bank reserves is
switched with another. Having $85B worth of electrons added to the
digital ledgers of electronic bank vaults — the ‘cash’ sitting in those
vaults like stagnant pools of water — is not in the same vicinity as
printing money directly. It’s not the same league, or even the same
sport.
It’s possible that QE will eventually prove inflationary above and beyond risk assets, sort of, on an extreme lag basis when banks finally start lending again. But the people who have been predicting QE as inflationary should not get credit for their predictions if inflation does finally turn up on a broad basis.
Why? Because they badly misunderstood the transmission mechanism (it’s about monetary velocity, not direct ‘printing’)… they got the timing spectacularly wrong (inflation was expected years ago, and is still nowhere in sight, other than financial assets)… and if banks start lending vigorously again, they will do so against the backdrop of an improving economy.
There are a lot of huge misconceptions when it comes to macroeconomics. The idea that the US government is “broke” is another one, but we won’t delve into that now. (If you would like to read much more in-depth treatment of these topics, along with directly actionable long / short ideas,
The introduction and embrace of QE highlighted dovish US policy vs hawkish European policy — which is now shifting. Even
as the US Federal Reserve took steps to stimulate via QE and keep
interest rates at zero, the European Central Bank (ECB) remained
dominated by hawkish Germans who, being Weimar-obsessed, really didn’t
give a crap if Spain, Greece, et al were put through soft depression
conditions via too-tight monetary policy. That dynamic is visibly
shifting now, with the Fed sounding more hawkish, and the ECB sounding
more dovish, by the day. In the event of a real deflationary global
growth threat, the German’s objections to ECB action, even a Europe-wide
QE, will be overridden.
US investors sent large quantities of capital abroad to invest in emerging market equities and debt — now not so much. The
attractiveness of EM assets relative to US assets is a dollar-weakening
phenomenon as capital flows away from US shores and into various
countries with patterns of fast growth and heavy infrastructure
spending. Now, though, emerging markets are in turmoil as “taper talk”
gains volume. What’s more, some countries (like Brazil) are already
showing destructive consumer debt trends (high annual percentage rates,
maxed out credit cards) surprisingly early in the cycle. All of this
means a general souring of emerging market attractiveness, which means
capital repatriating to US shores and again strengthening the USD.
The US deficit is contracting due to forced budget cuts and curtailed government spending. The
‘sequester’ and other budget restriction measures have led to a falling
(contracting) US deficit, which means government spending is falling
relative to a broad pickup in economic growth. This is a currency
strengthening backdrop, especially in comparison to countries where
emergency stimulus spending is likely to accelerate meaningfully
(Europe, Japan) in order to avoid the deflationary sand trap.
A low return, slow-growth world favors mature assets and mature companies (like US blue chips), in turn favoring the USD. To
the degree that global growth is slowing, emerging market equities
become less attractive in light of “hot money” problems, fallout from
wasteful infrastructure spending (which only comes to light when things
slow down), and backlash from trying to juice economic growth rates
(instead of allowing slower, but healthier and more stable, organic
rates of growth). As investors adjust to this sea change, they will
increasingly favor safety and solidity over sexy returns, which means a
migration to blue chips and large US multinationals (which in turn
favors the dollar via capital flows).
Professional traders already have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, but professional traders are not looking for a new trading technique or trading system (because they are already trading correctly). New traders do not have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, and new traders are exactly the traders who are looking for a new trading technique or trading system (and even worse new traders are often still looking for the holy grail of trading).
