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

Currency Wars continue to rage in the Far East

Today we travel to the other side of the world to review a small country which departed from a larger companion in 1965. But do not worry I am not looking at implications for Brexit today but noting the salvo fired this morning in the currency wars by the city-state of Singapore. Here is the statement from the Monetary Authority of Singapore or MAS.

 MAS will therefore set the rate of appreciation of the S$NEER policy band at zero percent, beginning 14 April 2016.

This replaced this.

 In October 2015, MAS kept the Singapore dollar nominal effective exchange rate (S$NEER) policy band on a modest and gradual appreciation path, but reduced its rate of appreciation slightly.

Which replaced this from January 2015.

MAS will therefore continue with the policy of a modest and gradual appreciation of the S$NEER policy band.  However, the slope of the policy band will be reduced.

These policy moves represent a clear change from the previous policy of currency appreciation. This started in 2012 and was an anti-inflation measure. However back in January 2015 the MAS was noting this.

The depreciation of the S$ against the broad-based strength of the US dollar was partly offset by the appreciation of the S$ against the Malaysian ringgit, euro, and Japanese yen. Thus, movements in the S$NEER have been relatively muted compared to bilateral S$ movements against the major currencies.

So they were seeing a feature of the times as we note that in addition to its domestic neighbour we see that 2 of the main currency depreciators are on the list and on the other side the strong US Dollar was on the list too. Even effective or trade weighted exchange rates can be an example of “you can’t always get what you want” to quote the Rolling Stones. The switch today seems to be an example of trying “to get what you need” as Singapore sets out a plan which no longer includes a rising currency.

At this point let me pose the question, how many countries these days will accept a rising currency and where does that leave those who want theirs to fall?

Why have they done this?

If we look at the outlook for inflation and growth we see this.

CPI-All Items inflation will remain negative throughout 2016……..According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy registered 0% growth on a quarter-on-quarter seasonally adjusted annualised basis in Q1 2016, following the 6.2% expansion in Q4 2015.

Ouch! That is quite a growth slow down is it not? Anyway in a familiar theme it is all apparently Johnny Foreigner’s fault.

The outlook for the global economy has dimmed since October…….held down by sluggish external conditions….a less favourable external environment……subdued growth in Singapore’s major trading partners.

Can we continue all blaming each other? That is a clear central banking theme these days as they all sing along with Lilly Allen’s album “It’s not me it’s you” Also I note the use of the current central banking buzzword “vigilant”.

Also you may note that there is no change to interest-rates. I suspect that having reduced its deposit rate to 0% the MAS has – wisely in my view – decided not to plunge into the icy cold world of negative interest-rates, for now at least.

Oh and there was a time where mild disinflation and a growth rate expected to be between 1 and 3% in 2016 would have been seen as an economic nirvana. How times change….

Never believe anything until it is officially denied!

From the MAS

This is not a policy to depreciate the domestic currency,

From Bloomberg

Singapore’s dollar slid 1.2 percent to S$1.3667 to the U.S. currency as of 6:51 a.m. in London, the biggest drop since Aug. 11.

Actually it also took a few other currencies with it as the phrase “competitive devaluations” came back into use.

New Zealand’s dollar tumbled 1.2 percent to 68.38 U.S. cents, the ringgit declined 0.9 percent to 3.9088 per dollar and Indonesia’s rupiah weakened 0.4 percent to 13,210.

Actually the South Korean Won fell by as much too.

Japan and the Yen

There is quite an irony in the Yen being described as an appreciator and there will be much chuntering into their sake at both the Bank of Japan and the Ministry of Finance at this description. But we know that in spite of this weeks decline the Yen at 109.2 versus the US Dollar is up some 8.5% on a year ago. They are of course still “watching” it although today’s spokesman seems to have been smoking something strong.

CHIEF GOVT SPOKESMAN: CAUTIOUS OF ONE-SIDED FOREX MOVES, READY TO TAKE APPROPRIATE STEPS IF NEEDED. (h/t @moved_average)

Oh and as of this morning the Yen has strengthened against many of its neighbours as they follow the Singaporean Dollar lower. Indeed the Yen weakened after comments like this. From Bloomberg.

Even if Japan wants a weaker yen, any government action would be futile as “Abenomics is nearing its best-before date,” said Eisuke Sakakibara, in charge of intervention at the Ministry of Finance from 1997 to 1999. He said an expansion of Bank of Japan stimulus would only temporarily slow the yen’s gains to 100 by year-end.

He picked the turn nicely.

China

Here the foreign exchange news gets swamped by the US Dollar exchange rate but the official communique at the beginning of this month said this.

On March 31, 2016, the CFETS RMB exchange rate index closed at 98.14, losing 1.50 percent from the end of February;

The new effective exchange rate has fallen from 100.94 at the turn of the year to 97.64 now so China’s leaders will have been reflecting on a gradual depreciation so far in 2016. This will be welcome as they struggle to keep the dream alive.

However whilst a 0.8% fall against the Singaporean Dollar to 4.75 may not be a major factor in Chinese calculations the fact that other currencies have fallen with it changes things. We will have to wait and see how they respond to this. They will also be noting that the Euro has drifted lower like the Yen this week as the currency environment shows a hint of ch-ch-changes.

Comment

The MAS has decided that a lower currency is something to which they can sing along to with The Cars.

I guess you’re just what I needed
I needed someone to feed
I guess you’re just what I needed
I needed someone to bleed

The environment has changed as they usually only make such a move in response to a recession and further food for thought is provided by the fact that at the end of last year economic growth was at 6.2%. Is that a new lower bound?

As to other devaluation/depreciation efforts we wonder in terms of album titles, Who’s next?

Still I guess those selling property near me in Nine Elms and at Battersea Power Station will be very grateful if new Far Eastern buyers emerge ahead of any future competitive devaluations. According to the mood music from there they may be sorely needed……

BP

Large losses seem to have been accompanied by a large pay rise for the Chief Executive and this response raised a smile.

think of how much bigger the loss could have been if he wasn’t being properly incentivised! (h/t @RealFinney)