8. USD Analysis: Long Term Trends
sources: HiddenLevers, TradingEconomics
âą Relative moves in interest rates matter â the Fedâs moves relative to others
âą Dollar peaks have come at both the middle and end of stock market cycles
âą Dollar has short term bounces during market fears, but doesnât last
Gold
Standard Era
Fed Hikes rates
to fight inflation
US Budget
Balanced
Fed cuts
rates from
6.5% to 1%
No lasting rally
on fear trade
9. USD Analysis: Recent Trends
USD vs 12M Yield:
divergence
sources: HiddenLevers
Phase 1
USD up post QE
No risk premium
Phase 2
USD Flat
Too much Oil
Phase 3
USD/OIL
inversion
returns
USD vs Oil:
back to
normal
11. Fed: Policy Impact on USD
sources: HiddenLevers, Bloomberg, CNN
QE 1 QE 2 QE3 Taper
Rate
Hike
Rumors
Rate Hike
âą QE 1 + 2 pushed USD down
âą QE3 could only keep USD flat
âą End of taper allowed USD to rocket up
âą Buy rumor, sell news: rate hike arrival ï USD mild reversal
12. Fed: Recent Decision on 4 Hikes ï 2 hikes
sources: HiddenLevers, CNN, Quartz
Negative
All criteria met for hike and no
raise = Fed losing credibility
Fed out of ammo â cant really
lower rates or do more QE
USD down in Feb = Market knew
before Fed said it out loud
Positive
Fed woke up to deflation as
bigger threat to US economy, not
inflation
Fed realized it canât raise rates
with rest of world lowering into
negative territory
Inflation flat
Labor force uptick
13. GOOD: Fed halts hikes
source: HiddenLevers, CNN, Financial Times
Fed dovishness continues in a negative rates world
Return of usual
S+P / USD
inverse correlation
Fed joins central
banks insanity
with easing
Commodities sail up
15. Brexit: Europe impact on UK
sources: HiddenLevers, BBC,; Economist
EUR
27 May 2015
Brexit referendum announced
GBP falls 13% on Brexit fears
23 June 2016
Brexit vote
Polls evenly split among Brits
16. Brexit: Poundâs Impact on USD
sources: HiddenLevers, Bespoke Investment Group
GBP and USD move
inversely, but huge
divergence began in
mid-2014 with giant
dollar rally
USD -2%
GBP -9%
long term
short term
GBP + USD move inversely, but huge divergence began in mid-2014 with giant USD rally
17. BAD: Brexit
Britain exits the Europe, creating GBP flight
source: HiddenLevers, Citi Research
Downside
impact likely
regional
UK departure
opens the door
for others
Money leaving
Pound chooses
USD over EUR
19. China: Slowdown Update
sources: HiddenLevers, WSJ, BBC, Chinese Bureau of Statistics
slowest econ growth in decades
Bad loans exceed 2008
US subprime
Mass domestic outflows
to US/UK/AUS
real estate + equities
$800b Jan stimulus
NO increase in sales
or production
20. China: Yuan Devaluation Dilemma
sources: HiddenLevers, WSJ,
China Reserves
High mark = 3.3 Trillion USD
2015: 513b spent defending Yuan
Young govt never experienced floating Yuan
Defend
- Bolster domestic consumers
- Save face abroad
Devalue
- Bolster exporter companies
- Conserve USD reserves
- Doesnât stem capital outflows
Should China defend Yuan or devalue?
21. UGLY: China Yuan Crisis
97 Asian crisis
-10% S+P
-50% currencies
source: HiddenLevers
Fierce USD rally
kills
commodities
Amateur govt mismanages Yuan deleveraging
China 2016
2x
Asia in 1997
China exhausts
USD reserves
22. Scenario: Currency Wars
Good:
Fed stops
hiking
Bad:
Brexit
Ugly:
Yuan
Crisis
USD Index
+11%
S&P
-15%
USD Index
+4%
S&P
-4%
USD Index
-10%
Fed continues the easy
money policy on low
inflation and foreign woes,
stoking equities higher.
The UK votes to leave the
EU, with negative impacts
for the Pound, Euro, and
regional stock markets.
China is forced to devalue
its currency, leading to a
new Asian currency crisis,
with worldwide ripple
effects.
S&P
+11%
23. Currency Wars â Take Aways
China devaluation big risk,
Brexit small risk
Renewed Fed dovishness pumps
market but for how long?
USD huge impact on commodities,
less so on S+P
Fed stuck here on rates.