By Callum Thomas
Well it’s a mouthful of a title, but sometimes you just have to say exactly what’s in the post and today we’re looking at 4 charts-in-one… and they are about as topical as it comes. The charts come from our weekly Global Cross Asset Market Monitor: the top left is the US dollar index, the top right is an equal weighted emerging market currency index (25 currencies vs USD), the bottom left is an equal weighted index of 10 Asian currencies vs the USD, and the bottom right of course is the Renminbi against the US dollar (USDCNY). Bottom line is there is a big move underway across global foreign exchange markets right now, and it’s quite likely there’s more to come.
What’s driving this, aside from a few idiosyncratic issues (e.g. Turkey – which I believe is simply a symptom of a wider issue), is monetary policy divergence, a subtle desynchronization of global growth, and softening macro picture in China. Fed tightening (rate hikes and QT) is a key catalyst, and the trade war just adds fuel to the fire. I talked previously about how Fed tightening and a stronger dollar is going to put stress on emerging markets, and the charts above show basically this thesis in action. The biggest risk is that you get a feedback loop of stronger dollar >> EM stress >> stronger dollar >> and so on. As previously noted, the USDCNY going through 7 could be a critical test (aka nail in the coffin) for the low volatility environment, and as I write the USDCNY is trading just over 6.933, so this test may come sooner than you expect…
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By Keith Weiner
Last week in Monetary Paradigm Reset, we talked about the challenge of explaining a new paradigm. We said:
“The hard part of accepting this paradigm shift, was that people had to rethink their entire view of cosmology, theology, and philosophy. In the best case, people take time to grapple with these challenges to their idea of man’s place in the universe. Some never accept the new idea.”
We were talking about the fact that money is the unit of account, and the assertion that irredeemable paper currencies are money.
This week, Turkey provides an opportunity to discuss this in a way most people can relate to. Their currency, the lira, has been falling for years, but the rate of its plunge accelerated dramatically this week. It closed last week at 19.6 cents, but on Friday it was 15.5. This may not seem like a lot, but those 3.1 pennies are about 21 percent. In a week!
Continue reading Monetary Consequence of Tariffs, Report
By Keith Weiner
Quantity Theory Revisited
The price of gold fell another ten bucks and that of silver another 28 cents. Perspective: if you’re waiting for the right moment to buy, the market is offering you a better deal than it did last week (literally, the price of gold is a 7.2% discount to the fundamental vs. 4.6% last week). If you wanted to sell, this wasn’t a good week to wait. Which is your intention, and why?
We have written many times that the quantity of dollars does not cause the price of gold to rise. Two weeks ago, we showed a graph of M2 overlaid with the gold price. While the price of gold has generally been rising over the long term, there are long periods of rising quantity of what most call money, with flat or falling gold price. How can this be? If an increase in the quantity of money does not make prices go up, what does?
A price goes up if and only if a buyer takes a seller’s offer. If buyers repeatedly take the offer, then the offer will keep moving up, and not stop moving up, until buyers stop taking the offer. OK, the theory of price formation is nice, but what makes buyers keep taking the offer, while the price relentlessly moves up?
Continue reading Crying Wolf, Report 22 July 2018
As noted on Wednesday afternoon, the dollar managed its first monthly gain in four in February, leading some to wonder if we’ve seen a turning point for a greenback that’s been more “beleaguered” than Jeff Sessions after a Trump Twitter tirade.
Of course the dollar story is complicated these days. On one hand, you’ve got a ballooning deficit in the U.S. and worries that the Trump administration is still angling for a weak dollar policy to bolster U.S. trade. On the other hand, you’ve got rising U.S. yields and a Fed chair who delivered a hawkish surprise earlier this week during his first public testimony on Capitol Hill.
Continue reading The Big Dollar Question: Is This The Turning Point?