Tag Archives: U.S dollar

What Happens When the U.S. Dollar Is No Longer A Hedge Fund Hotel?

Bloomberg, Mar 23, 2016

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Risks for a further squeeze lower for the greenback, says Bank of America.

What Happens When the U.S. Dollar Is No Longer A Hedge Fund Hotel? – Bloomberg Business

In the wake of last week’s dovish decision from the Federal Reserve, investors have been throwing in the towel on the U.S. dollar.

But Bank of America Merrill Lynch’s proprietary positioning data suggests there’s still another major shoe to drop for the greenback. In a note to clients, FX Strategists Myria Kyriacou and Athanasios Vamvakidis illustrate that hedge funds’ long position in the U.S. dollar remains substantial relative to the past 12 months and to other investors.

“Real money is now short USD for the year, but hedge funds remain long, pointing to risks for a further squeeze USD lower,” they conclude.

Real money, in this case, refers to pension funds, real estate investment trusts, smaller asset managers, and the like. The strategists note that these parties often use foreign exchange positions to carry out trades in equities or debt, and therefore they may not be expressing a view on the currency itself. However, the positioning of this ‘real money’ does imply something about the appetite for assets denominated in U.S. dollars, an important factor for the currency.

During an interview on Bloomberg TV, Vamvakidis said that any advances in the U.S. dollar going forward, both against other developed market currencies and their emerging market peers, would not be broad based.

“We’re not going to see an overall strengthening trend of the dollar across the board,” he said. “We do expect the dollar to be stronger against the euro, not against the yen.”

After largely treading water to open the year, the U.S. dollar has weakened as market participants have had doubts about the extent to which monetary policy stateside can diverge from the rest of the world. The U.S. dollar index and trade-weighted broad dollar index are both off roughly five percent from their recent respective peaks.

“The market remains short [emerging market currencies] against the dollar, not as short as a few weeks ago given the recent rally, but we believe there is a further squeeze of this position ahead,” asserted Vamvakidis.

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U.S. Inflation Expectations Are Lowest in Years

Bloomberg, Sep 14, 2015

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* Inflation outlook three years ahead dips to 2.9 percent
* Households see little change in year-ahead earnings growth

Consumerexpectations for inflation three years ahead fell last month to the lowest level in records going back to June 2013, according to a Federal Reserve Bank of New York survey released Monday.

The median respondent to the New York Fed’s August Survey of Consumer Expectations predicted annual consumer price inflation three years hence would be 2.9 percent, down from 3 percent the month before. Median expected inflation a year ahead fell to 2.8 percent from 3 percent, marking the second-lowest response in the history of the survey.

The results come ahead of Sept. 16-17 meeting of Fed policy makers in Washington at which Fed ChairJanet Yellen and her colleagues will debate whether to raise interest rates for the first time in nearly a decade.

Officials said in a statement following their last meeting in July that they needed to see “some further improvement” in the job market and be “reasonably confident” in the inflation outlook. Their preferred measure of prices, the personal consumption expenditures price index, was up 0.3 percent in July from a year earlier and has run below the central bank’s 2 percent target for over three years.

Fed Vice ChairmanStanley Fischer attributed much of the current shortfall to the recent drop in oil prices and appreciation of the U.S. dollar during an Aug. 29 speech in Jackson Hole, Wyoming.

“Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” Fischer said.

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Just the Mechanics of the Fed’s Exit Strategy Could Boost the Dollar

Bloomberg, Sep 1, 2015

Rotating out of euros and into dollars. Rotating out of euros and into dollars.

But a stronger greenback could complicate matters.

The U.S. dollar has risen 17 percent against the euro over the past year, as the Federal Reserve has drawn closer to raising interest rates for the first time since 2006.

There could be further appreciation ahead for purely mechanical reasons, given the unique nature of the upcoming tightening cycle and the new tools the Fed will use to raise rates, according to Zoltan Pozsar, a director of U.S. economics at Credit Suisse Securities USA in New York.

To raise short-term interest rates with $2.5 trillion of excess reserves in the banking system, the Fed has designed an overnight reverse repurchase agreement facility that will absorb cash from non-bank counterparties, mostly money market mutual funds.

In an overnight reverse repo, the Fed borrows cash at a specified rate of interest and posts securities as collateral and then unwinds the transaction the following day. Some analysts estimate that this facility could eventually drain more than $1 trillion from the system on a daily basis as the Fed lifts rates.

U.S. money market mutual funds placing that much money at the Fed each day will free up an equivalent amount of short-term dollar-denominated instruments, such as U.S. Treasury bills, for others to invest in—including foreign reserve managers at central banks around the world.

Pozsar, who has been studying the plumbing of the modern financial system for years in positions at the New York Fed and U.S. Treasury, has just suggested in a report that there are already signs of increased interest from foreign reserve managers in dollar assets, especially given that their euros now yield negative rates.

He points to a lesser-known reverse repo facility at the New York Fed—one it operates for foreign accounts.

As of Wednesday, Aug. 26, foreign reserve managers held $163 billion in reverse repos at the New York Fed, up 44 percent from $113 billion at the end of 2014.

The rise is an indication of “reserve managers’ strong demand for safe, short-term, U.S. dollar instruments,” Pozsar writes. “But the foreign repo pool is not full allotment. Its size is determined by the New York Fed.”

The overnight reverse repo facility the Fed will use to lift rates here at home, on the other hand, will probably be full allotment—meaning the Fed will do as many overnight reverse repos with money funds as the market demands—once the Fed begins raising rates, according to Pozsar.

“A full allotment facility could lead to money funds trading out of U.S. Treasury bills, leaving more for FX reserve managers to invest in,” he wrote. “This in turn could unlock flows that are constrained by quantities at present.”

The dollar’s rise has been a source of apprehension for Fed officials as they try to figure out when to raise rates for the first time in nearly 10 years. The minutes of the policy-setting Federal Open Market Committee’s July 28-29 meeting revealed that some participants “discussed the risk that a possible divergence in interest rates in the United States and abroad might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports,” which have to an extent hindered U.S. inflation and economic growth.

Nevertheless, “most participants still expected that the downward pressure on inflation from the previous declines in energy prices and the effects of past dollar appreciation would prove to be temporary.”

The risk is that big flows from foreign central banks rotating out of euros and into dollars over the coming quarters drags out this “temporary” dynamic for a while longer.

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Fear factor: Why China scares investors

CNN, Aug 16, 2015

More than plunging oil prices, the strong U.S. dollar, turmoil in Greece or a Federal Reserve rate hike, investors remain preoccupied with China — and for good reason.

Concerns about China ratcheted higher this week after the country shocked the world by devaluing its currency. That raised the specter of a global trade war or that Beijing was panicking over a more severe economic slowdown than expected. Chinese officials already spooked global investors with their heavy-handed response to the crash in stock prices earlier this summer.
“Could it be that they really don’t know what they are doing? I think so, and I think that is starting to seriously unnerve investors around the world,” Ed Yardeni, president of investment advisory Yardeni Research, wrote in a note to clients.
If China sneezes, the world catches a cold
The biggest reason why China matters is size. Unlike Greece, Puerto Rico or other one-off situations, China has the scale to impact the entire globe.
It’s now the world’s second-largest economy, blowing past Japan and Germany in recent years. China is also the biggest consumer of raw materials like oil and copper, both of which have plunged in recent weeks. A more dramatic decline in Chinese growth could cause commodities to crumble further, unleashing financial havoc on countries that rely on those natural resources.
“That could result in a debt crisis somewhere in the world. In other words, China’s mess may be about to provide more than enough critical mass for a global meltdown,” said Yardeni.
Growth engine has stalled
For much of the past 15 years, China has served as the key catalyst to global growth. But China’s economy is maturing, with growth slowing from 10% in 2010 to just 7% in the first half of this year.
“Investors look to China as this magical economic utopia where things go up by three times the amount you see in other nations and will do so forever,” said Sam Stovall, chief investment strategist at S&P Capital IQ.
Once a positive, China exposure is worrisome now
But now reality has set in — and it’s creating headaches for companies with significant exposure to China. That includes American multinationals like Apple (AAPL, Tech30), General Motors (GM), Nike (NKE), Starbucks (SBUX) and KFC owner Yum! Brands (YUM).
“Where China exposure was once a source of optimism and significant potential growth for U.S. stocks, it has become a source of disappointment in recent results, from autos to TVs to iPhones to machinery,” Bank of America Merrill Lynch analysts wrote in a report.

Devaluation raises dollar jitters
A strong U.S. dollar is great for American tourists traveling overseas, but it can be a problem for companies based here. When the dollar gains on its rivals, it makes goods sold overseas more expensive.
The greenback’s breathtaking rally over the past year is only being boosted by China’s decision to devalue its currency. That’s one reason U.S. stocks tumbled earlier this week on the surprise move.

Deflation could be shipped to U.S.
China’s slowdown is putting downward pressure on prices there.
Wholesale inflation has declined on a year-over-year basis for 41 consecutive months through July, according to Yardeni. That’s not healthy.
The concern is that deflation — something there is no easy fix for — could spread from China to other countries. It’s already caused prices for raw materials like metals and oil to decline. If signs of deflation emerged in the U.S., the Federal Reserve may need to delay or scale back its plans to raise interest rates.
“Inflation is the missing piece in the U.S. It’s still nowhere near where the Fed wants it to be. You get a move like this, it brings the threat of deflation back to life,” said Nicholas Colas, chief market strategist at ConvergEx.

Investors don’t trust China
Much of China remains shrouded in mystery. That’s because many investors believe Beijing’s official statistics are fudged to make the economy look better than it really is. In other words, China’s economy may actually be in worse shape than people realize.
“It’s like the Wizard of Oz: A lot of this is done with smoke and mirrors behind the curtain,” said Stovall.
China’s recent actions aren’t helping either. To the dismay of Western investors, the Chinese government helped inflate the bubble in the stock market and later took an overly-aggressive approach when prices crashed. And then the currency devaluation came out of the blue.
Beijing risks more than just offending investors. Future efforts to revive growth will likely be greeted with increased skepticism from the markets.
“While spending programs and rate cuts may provide some relief, confidence in their efficacy is waning,” Bank of America Merrill Lynch wrote.

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Why Canada Has Become a Problem for Janet Yellen

Bloomberg, Aug 6, 2015

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The U.S. currency is yet again rising to a dangerously high level.

Federal Reserve Chair Janet Yellen said less than a month ago that she expected the dollar’s drag on the American economy to dissipate. She may not have foreseen that the greenback would surge to an 11-year high against the currency of the U.S.’s biggest trading partner.

As the greenback’s advance against the euro and the yen subsided, its 5 percent rally against the Canadian dollar this quarter may prove to be more detrimental to the world’s biggest economy. The U.S.’s northern neighbor buys about 17 percent of America’s products, more than any other nation, data compiled by Bloomberg show. And shipments are already have declined after reaching a record last year.

U.S. exports to Canada have declined from record levels reached last year as the Canadian dollar has weakened against the U.S. dollar.
U.S. exports to Canada have declined from record levels reached last year as the Canadian dollar has weakened against the U.S. dollar.

 

A firm dollar makes American goods relatively more expensive abroad, presenting a hurdle for Fed officials as they prepare to raise interest rates for the first time since 2006.

The central bank’s trade-weighted dollar index is approaching the March high that prompted Yellen at the time to warn the currency is weighing on exports and inflation. The index, which includes only major currencies, gives an almost 13 percent weighting to Canada, trailing only the euro area’s influence.

“Since late June, the speed in the dollar rally is probably equivalent to what we had earlier,” said Charles St-Arnaud, senior economist at Nomura Holdings Inc. in London. “I can hear some investors saying, `Oh yeah we’re back to where we were in March when the Fed started to be worried about the dollar.”’

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