The world wants and needs US Dollars and it wants them now

In the midst if the financial market turmoil there has been a consistent theme which can be missed. Currency markets rarely get too much of a look in on the main stream media unless they can find something dramatic. But CNN Business has given it a mention.

The US dollar is rallying against virtually every other currency and it seems like nothing can stop it.

There are lots of consequences and implications here but let us start with some numbers. My home country has seen an impact as the UK Pound £ has been pushed back to US $1.20 and even the Euro which has benefited from Carry Trade reversals ( people borrowed in Euros to take advantage of negative interest-rates) has been pushed below 1.10. Even the Japanese Yen which is considered a safe haven in such times has been pushed back to 107.50. We can get more thoughts on this from The Straits Times from earlier today.

SYDNEY (REUTERS) – The Australian dollar was ravaged on Wednesday (March 18) after toppling to 17-year lows as fears of a coronavirus-induced global recession sent investors fleeing from risk assets and commodities, with panic selling even spilling over into sovereign bonds.

The New Zealand dollar was also on the ropes at US$0.5954, having shed 1.7 per cent overnight to the lowest since mid-2009.

The Aussie was pinned at US$0.6004 after sliding 2 per cent on Tuesday to US$0.5958, depths not seen since early 2003.

So there are issues ans especially in a land down under as an Aussie Dollar gets closer to the value of a Kiwi one. In fact the Aussie has been hit again today falling to US $0.5935 as I type this. No doubt it is being affected by lower commodity prices signalled in some respects by Dr. Copper falling by over 4% to US $2.20

Sadly the effective or trade-weighted index is not up to date but as of the 13th of this month the official US Federal Reserve version was at 120.7 as opposed to the 115 it began the year.

Demand for Dollars

It was only on Monday we looked at the modifications to the liquidity or FX Swaps between the world’s main central banks. Hot off the wires is this.

BoE Allots $8.210B In 7 Day USD Repo Operation ( @LiveSquawk )

This means that even in the UK we are seeing demands for US Dollars which cannot be easily got in the markets right now. Maybe whoever this is has been pushing the UK Pound £ down but we get a perspective by the fact that this facility had not been used since mid-December when the grand sum of $5 million was requested. There were larger requests back in November 2008.

I was surprised that so little notice was taken when I pointed this out yesterday.

Interesting to see the Bank of Japan supply some US $30.3 billion this morning until June 11th. Was it Japanese banks who were needing dollars?

Completing the set comes the European Central Bank or ECB.

FRANKFURT (Reuters) – The European Central Bank on Wednesday lent euro zone banks $112 billion at two auctions aimed at easing stress in the U.S. dollar funding market, part of the financial fallout of the coronavirus outbreak.

The ECB said it had allotted $75.82 billion in its new 84-day auction, introduced by major central banks last weekend in response to global demand for greenbacks, and $36.27 billion at its regular 7-day tender.

Actually it was good the ECB found the time as it is otherwise busy arguing with itself.

With regards to comments made by Governor Holzmann, the ECB states:

The Governing Council was unanimous in its analysis that in addition to the measures it decided on 12 March 2020, the ECB will continue to monitor closely the consequences for the economy of the spreading coronavirus and that the ECB stands ready to adjust all of its measures, as appropriate, should this be needed to safeguard liquidity conditions in the banking system and to ensure the smooth transmission of its monetary policy in all jurisdictions.

So we see now why the Swap Lines were reinforced and buttressed.

Oh and even the Swiss Banks joined in.

*SNB GETS $315M BIDS FOR 84-DAY DOLLAR REPO ( @GregBeglaryan )

Emerging Markets

This is far worse and let me give you a different perspective on this. During the period of the trade war we looked regularly at the state of play in the Pacific as it was being disproportionately affected.

Let me hand you over to @Trinhnomics or Trinh Nguyen.

Swap lines to EM please (also to Australia – we like Australia in Asia too as it’s APAC). “the supply of liquidity by central banks is beneficial only to those who can access it,

Her concern was over that region and EM is Emerging Markets. I enquired further.

Operationally, the bid for USD in Asia and squeeze in liquidity reflects the massive role of the USD in the global economy & finance. For example, 87% of China merchandise trade is invoiced in US. and the loss of income from export earnings will further push higher the demand of USD. To overcome the global USD squeeze, the Fed must step up its operational support via swap lines with economies such as South Korea.

That was from a piece she wrote for the Financial Times but got cut from it. On twitter she went further with a theme regular readers will find familiar

Guys, the reason why we have a dollar shortage is because we have levered!!!!!!!!!!! So when income collapses, we got major problem because we have leveraged & so debt needs servicing etc. Aniwaize, the stress u see is because we live in a world that’s too leveraged!!!

And again although I would point out that leverage can simply be a gamble rather than a hope for better times.

Don’t forget that low rates only lower interest expense, u still got principal that is high if ur debt stock is high. When u lever, u think the FUTURE IS BETTER THAN TODAY. Obvs very clearly that whoever thought there was growth is in for a surprise given the pandemic situation.

She looks at this from the perspective of the Malaysian Ringgit which has fallen to 4.37 versus the US Dollar and the Singapore Dollar which is at 1.44.

Comment

We are now seeing a phase of King Dollar or Holla Dollar and let me add some more places into the mix. We have previously looked at countries which have borrowed in US Dollars and they will be feeling the strain especially if they are commodity producers as well. This covers quite a few countries in Latin America and of course some of those have their own problems too boot. I also recall Ukraine running the US Dollar as pretty much a parallel currency.

The beat goes on.

In times of stress, capital flees emerging markets to seek safety in $USD . This crisis is no different. ( @IceCapGlobal)

which got this reply.

Investors have yanked at least US$55bn from EMs since January 21, according to the Institute of International Finance, exceeding the withdrawal in 2008. ( @alexharfouche1 )

Let me finish by reminding you that ordinarily we discuss matters around the price of something. But here as well as that we are discussing how much you can get and for some right now that people will not trade with you at all. That is why we are seeing what is effectively the world’s central bank the Federal Reserve offering US Dollars in so many different ways. It is spraying US $500 billion Repo operations around like confetti but I am reminded of the words of Glenn Frey.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

The Investment Channel

26 thoughts on “The world wants and needs US Dollars and it wants them now

  1. What an amazing paradox, the Fed is hosing the markets with trillions of printed dollars and there is a shortage of dollars! Also the dollar index has gone vertical to reflect that shortage, when you would expect in such a money printing environment the dollar to be collapsing. In addition to the collapsing price of oil adding to the shortage, there is the old Triffin’s Paradox, whereby when the US stops buying or spending(as in a recession such as is underway) the world is starved of dollars as well, in order to keep the supply of dollars to the rest of the world, the US has to run a permanent trade deficit, otherwise we get situations like we are currently in.

    The pounds collapse continues, and I have heard Shauns argument for the Euro strength(Euro carry trade being unwound) but the sterling index is also down 10% in the last week, it still smacks of devaluation to me.The Bank of England love crises such as these to hide behind.

    https://en.wikipedia.org/wiki/Triffin_dilemma

    • Hi Kevin

      If I was Governor of the Bank of England I would have stepped up today. You don’t have to act as a first move just ask a few exchange-rates. But actually having thoughts and plans excludes me from the job! Meanwhile according to the Financial Times the new incumbent said this.

      “Andrew Bailey says the UK central bank is willing to pump unlimited quantities of money into the economy via its new commercial paper facility”

      It is always unwise for a central banker to say “unlimited” as you can get called as the Swiss National Bank found out.

  2. Target for EUR/GBP I gave a couple of weeks ago has been met at 0.93 after launching from its low in February at 0.83, pulling back slightly now, but sterling is going to be destroyed by our “friends” on the way to the target they have for us joining the Euro,it is losing 1.5-2.0% a DAY against the dollar, and no reason is apparent for the losses against other currencies, expect the breakout shortly above 0.926.
    To give an indication of the violent nature of sterlings fall, it took six months to fall from 0.93 to 0.83 in February, and it has regained that position in just one month.

  3. Hello Shaun,

    we can all sing along with Sir Cliff

    We’re all going on a Corona Holiday
    no more working for a month or two
    Fun and laughter on our Corona Holiday
    No more shopping for me or you,
    For a month or two.

    We’re going wash our hands so brightly
    We’re going wipe our bums till they’re blue.
    We’ve all got tummy movies,
    Now let’s see if the bog roll lasts too..

    Everybody has a Corona Holiday
    Doin’ decorating they always wanted to
    So we’re going on a Corona Holiday
    To make our decor dreams come true
    For me and you.
    For me and you.

    —-

    ok , I’ll get my hat and coat ……

    Forbin

    • Hi Forbin

      Someone nearby was playing Living Doll a few days ago so maybe Sir Cliff is coming back into fashion. As to the job situation I spoke to someone earlier who had 3 jobs but now as one and on the way passed someone talking to a friend who had lost their job. So the heat is on in another way too…

  4. Shaun, welcome to our new feudal world, its happened a lot faster than we thought possible. We are now down the rabbit hole, through the looking glass, on our desert world; think of the analogy, we are there. Its not going back to BC , because ‘they’ won’t let it.

  5. Back in the UK the BOE looking at even more help to business looking at buying paper debt and possible lower interest rates but Bailey downplaying this, he is aware of the fall of the £ but wont discuss it at the moment.

    https://notayesmanseconomics.wordpress.com/2020/03/18/the-world-wants-and-needs-us-dollars-and-it-wants-then-now/#comments

    This must be worse than the financial crisis of 2008 anyone else think so?

    My local town has never seen so many shops closed the last year, the streets deserted.

    • “This must be worse than the financial crisis of 2008 anyone else think so?”

      it was bad before the lemonade bug , so it’s going to get worse before it gets worse !

      the 5th horseman is mounted up already

      Forbin

  6. Hello Shaun,

    well after hearing that copper seems to kill the virus quickly ( compared to plastics) I’m surprised that DR copper hasn’t actually risen …

    Also I have reported that house pries were down 10% YoY , now even viewings , poor that they were , are scarer than bog roll at your local supermarket …… so how is any house price help going to work if we’re all at home hiding under the duvet ?

    the economy is 80% services , soon enough we ‘ll have martial law because idle hands…..

    And finally some people , who I used to know at Green Peace, will be happy as Larry as consumerism gets vaporized to save the planet But you know you have to careful what you wish for because you might actually get it (!) .

    no consumerism > no economy > no democracy

    Still , get some popcorn and pull up a chair !

    Forbin

  7. They want the USD because we might as well use the GBP in place of bog roll. Have to disagree with Kevin about the EU trying to force us into the euro as no rational person would want to hold the GBP in preference to the euro! Kevin was right about LTCM and I can recommend “When Genius Failed” about that episode.

    I am equally chuckling at the thought of that Chinese-American CFA, who was pushing emerging markets for yield and growth. Anyone taking that advice would have lost their shirt by now. Of course, it is also tough to take advantage of the slide (or correction as it was called here) in US stocks as the GBP has fallen equally quickly. It is still bo**ocks time – I made some money out of Petra Diamonds a few years ago and it seems a rational store of value – trouble is, they already have debt issues.

    It is indeed strange that the nation, which caused the last crash and this one with its fake rates is supposed to be a safe haven. I suppose the Swiss would be happy with any pressure taken off them. Sunak is now talking helicopter money and cheap loans alongside the latest clown at the BoE obeying the orders from Whitehall, but we know what happens with “temporary measures”. Those housing signals must have been really bad to prompt 30% of GDP increase in the money supply, but like QE, it would never be withdrawn.

    At the bottom of it once again are a new load of masters of the universe, who have no grasp of monetarism. Friedman said money causes inflation through excess demand, not that money will endlessly expand demand – the logic should be obvious. Yet just a few months ago, I was reading articles about how the banks and politicians thought they had found the magic money tree – keep rates ultra-low and you can print as much as you like to buy Govt debt, so govts can borrow and spend as much as they like to create the fiscal stimulus Shaun was talking about yesterday before helicopter money drowned him out. GDP growth would last forever. Trouble it, it crushed consumption, held down pay and kept weak companies alive. Then the black swan came.

    Biggest irony of all was a story on the BBC site, which suggested that the story about Dutch tulip mania was largely a myth. While it may well have been greatly exaggerated, it was the underlying tone of it couldn’t happen anyway that amused me. So what do we do with all these USD – Friedman suggested they would correct the US trade deficit in time, because you either burn them or buy something Yank with them. I suspect he overlooked the tendency for people to stash them away – as many will do with helicopter money.

    • Hi Dave

      I remember the LTCM saga as I was in the short sterling options pit on the LIFFE floor on a Friday lunchtime and we got picked off. That’s the danger of being in a pit that someone knows better elsewhere. It took my a fortnight to dig my way out of one error!

      Anyway I was having a discussion on social media and noted this on their twitter feed and it reminds me of your EM point.

    • Hi, Dave. Tulipmania pretty much was a myth, ably exposed by an English historian, Anne Goldgar:
      https://www.smithsonianmag.com/history/there-never-was-real-tulip-fever-180964915/
      Professor Goldgar has said her book on the subject should have been called “Tulipmania: More Boring Than You Thought”. The South Seas Bubble, which Shaun has written about quite a lot in his blog, is probably a much better historic example of a bubble. I wrote a previous comment to one of Shaun’s blogs, complaining that when a former Chief Statistician of Statistics Canada was asked to comment on a paper I co-authored advocating a acquisitions approach to owner-occupied housing in the Bank of Canada’s target inflation indicator as a protection against housing bubbles, he attacked our paper based on the reductio ad absurdum comparison with Tulipmania. The ridiculous thing was that flowers were already in scope for the CPI, their index measured using the same acquisitions approach that we recommended for owner-occupied housing. Even as a reductio ad absurdum argument it was a total fail, as we were already protected against the repetition of a 17th century bubble catastrophe on another continent that had never actually happened.

  8. Now for some good news: Eastenders has suspended filming (it’s depressing enough without that too) and the Eurovision singsong is delayed (bad news if you are gay though, apparently).

  9. Great blog as usual, Shaun. Finance Minister Bill Morneau announced a fiscal stimulus for Canada this year, with Bank of Canada Governor Stephen Poloz at the same press conference. Fiscal policy gurus had said prior to the announcement that the package would have to amount to 1% or 2% of GDP to be serious. The actual package announced was only for CAN $27B (about £15.9B) in aid, a little over 1% of nominal GDP, but the government claimed it was a fiscal package amounting to 3% of GDP by including their estimate of tax deferrals. Alberta was completely ignored in the package, although Morneau claimed an investment package directed at that province was on its way, including a proposal to clean up orphaned oil wells. Here is a link to the conference, which can be watched in an English version with simultaneous translation when French is spoken, or a floor version, where you just hear whatever was said in English or French. Morneau has a French surname, but his French is rather weak. At one point he says that Canadians should stay at your place (“chez vous”) when he meant to say that they should stay at home (“chez eux”), although he does correct himself.
    https://www.cpac.ca/en/programs/headline-politics/episodes/66172403/
    Sadly, the first NHL player to be diagnosed with COVID-19 is an unidentified Ottawa Senator. Since the last game he played was an away game in Los Angeles with a long flight home afterwards, he may have infected other team-mates or coaches.
    Governor Poloz isn’t much for forward guidance, unlike his predecessor, and wouldn’t commit to another interest rate cut in April when he was asked, but some analysts seem to think there will be another cut, likely to take the overnight rate to 0.25%. With such low borrowing costs, the Trudeau government should be less worried about a major fiscal stimulus.

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