When Will the Dollar Snap-Back?

"When will the long awaiting dollar snap-back happen?" I keep getting this question from clients.

When CPI and PPI are resolutely reading deflation from an international perspective. (I might be wrong, but when you consider the dollar index's dive, US CPI is already deflationary from the vantage of (for example) a European importer. It just may take an across the board negative report to get the ball rolling.)

Latest price reports from Citi Investment Research:

DATE	TIME	INDICATOR	PERIOD	PREVIOUS	FORECAST	ACTUAL
9/16	8:30	Consumer Price Index	Aug	Unch	+0.3%	+0.4%
9/11	8:30	Import Price Index	Aug	-0.7%	+1.0%	+2.0%
9/15	8:30	Producer Price Index	Aug	-0.9%	+0.8%	+1.7%
10/14	8:30	Import Price Index	Sep	2.0%	+0.2%	+0.1%
10/15	8:30	Consumer Price Index	Sep	0.4%	+0.2%	+0.2%
10/20	8:30	Producer Price Index	Sep	1.7%	tbd	tbd

Wells Fargo posted a sober reminder about USD fundementals on Friday:

• Lured by higher yields abroad, American purchases of foreign securities remained positive in August.
• Including short-term securities and bank lending, only $10.2 billion worth of capital entered the country during August, which is not enough to support the current account deficit. Until net capital inflows pick up, downward pressure on the dollar will likely continue.

That bottom right chart, "US Total Net Capital Inflows," is pretty alarming.

When negative price numbers start floating out there again, our goods are more marketable for exports and we’ll start making strides against deficits and start taking capital inbound.

There are serious gloabl imbalances that need leveling: the US is an exponential net borrower, while China is a counterforce net creditor. I just don't know how desireable a global rebalancing is right now, with the US Treasury over-extended and reliant on foreign creditors to finance the government spending that's financing this... recovery?

Then there's China appearing to make the same mistake the US did with Smoot-Hawley back in 1930. They’re misreading the capital flows into their economy. The strength of their markets/asset values and the potential strength of the Yuan (if it weren’t all but pegged) have them fooled into believing that they’re somewhat autonomous and independently prosperous.

From Martin Armstrong:

It was the financial war between European nations attacking each other's bond markets openly shorting them that led to all of Europe defaulting on their debt. Even Britian went into a moratorium suspending debt payments. This is what put the pressure on capital flows sending waves of captial to the United States.

...then the US misread the resulting USD strength. At that time, it was hot capital flow (looking for a higher, less risky return) that sent the USD to record highs--but economists interpreted it as the domestic economy's organic resolve. Nevertheless, the US went protectionist with Smoot-Hawley. The Great Depression ensued as capital reverted back to Europe, and the rest is history.

What’s happening today is a capital flight from the developed Western nations --where debt default expectations are pretty onerous -- to China, where the gears are still turning. (US Corporate Bond markets have rallied, but don't forget all the government has done to displace the Agency/MBS/Treasury demand lull.) China sees the fresh investment and has moved to insulate itself, shifting slowly away from the export model on which it flourished. They're tapping their rainy-day surplus, and the funds are full-flowing as they confuse exogenous contributions (hot money) with endogenous growth potential. It's all too fragile.

After a good 3Q earnings season pans out, US firms will start rebuilding inventories under the impression that things are fine. Well, consumer credit is still contracting and goods transportation (like railroads and freights) is still looking for a bottom, but capacity utilization increased from 69% in September to a surprise 70.5% Thursday. You can sense the change in tone—all the CEOs are spewing choice words like “positive,” “recovery,” etc. Increased inventories = more supply with the USD still cheap = increased exports... especially with the Euro turning north of late.

I’m not saying it’s permanent, but the USD will snap back. Watch international capital flows and price changes.

Comments

[ryanclarke:]

Yes, the cheap dollar will increase labor demand in this country ... for cheap manufactured goods. Trashing the dollar will also induce $5 OR EVEN $10 gasoline a gallon at the pump in the United States. So all the shoe making and clothe making and Mexican style factory assembly jobs will come back to the United States ... but the blue collar factory worker in the U.S. will have to sleep on the factory floor between shifts just like laborers in China do today. Don't count on a hyrdrocarbon replacement for transportation needs in the United States any time soon, and high gasoline costs will not provide a suitable incentive to make the transistion before the current U.S. economy shuts down. Besides failing to take depletion of natural resources into account, the Fed's inflation growth model fails to take the value of time into account ... even though every knows time is money.

Oct 17 02:48 AM

[Dave Wrixon:]

The outflow from the Dollar have not even started yet. The dollar is a Ponzi scheme and when the rush for the door starts, there is not a force on this Planet that can save it. What is worse China and others already know this, they are just jostling for position.

Oct 17 03:48 AM

[tobi:]

One can survive $5 for gas easily, this is what europe has been paying for years.

Oct 17 04:40 AM

[LilBob:]

I don't know if I'd use the term "snapping back" but there will clearly be a "race to the bottom" in terms of currency valuations as the US is still the ultimate market for many consumer goods. Don't forget that much of China's wealth came from them supplying goods for our K-Mart, Wal-Mart and Target stores. Without US discount retail to use as an economic crutch the Chinese will have a much harder time managing economic growth, and they will do everything they can to keep the Yuan relatively weak. The US is still a leading producer of high end technology goods-such as manufacturing control systems and medical imaging equipment-and high end consumer goods-premium apparel, boats, riflfes, etc.-advanced manufacturing countries like Germany and Norway are also likely to attempt to manage some deflation of their currencies so as not to be priced out of competitiveness in those markets.

Oct 17 07:41 AM

[willynill:]

Daisuke Uno, at Japan's third largest bank said recently: "The dollar is now at wave 5 of the 40-year Elliott Wave Cycle. It will drop to 50 yen during the current wave, based on multiplying 92 (the low point during wave 1 that ended March 1973) by 0.764, a number in the Fibonacci sequence, and subtracting from the 123.17 level of 2nd quarter of 2007."

Oct 17 11:10 AM

[paulsjj:]

Sombody has to buy the stuff...that my beome problematic.


On Oct 17 07:41 AM LilBob wrote:

> I don't know if I'd use the term "snapping back" but there will clearly
> be a "race to the bottom" in terms of currency valuations as the
> US is still the ultimate market for many consumer goods. Don't forget
> that much of China's wealth came from them supplying goods for our
> K-Mart, Wal-Mart and Target stores. Without US discount retail to
> use as an economic crutch the Chinese will have a much harder time
> managing economic growth, and they will do everything they can to
> keep the Yuan relatively weak. The US is still a leading producer
> of high end technology goods-such as manufacturing control systems
> and medical imaging equipment-and high end consumer goods-premium
> apparel, boats, riflfes, etc.-advanced manufacturing countries like
> Germany and Norway are also likely to attempt to manage some deflation
> of their currencies so as not to be priced out of competitiveness
> in those markets.

Oct 17 06:51 PM

[LilBob:]

On Oct 17 06:51 PM paulsjj wrote:

> Sombody has to buy the stuff...that my beome problematic.

I agree 100% Paul, but if traits such as a sense of foresight and balance were more commonplace we probably wouldn't have had a subprime mortgage mess and likely wouldn't be in this recession.

Oct 17 09:52 PM

[Paul from C...:]

Didn't anybody read the excellent article in the WSJ by David Malpass on October 8th? The title was "Devaluing Currency has never led to Prosperity." The title summaries it all.

Oct 17 10:19 PM

[Romeo Fayette:]

You know, it's funny because I refrained (as best I could) from bashing Fed policy. I wrote an article recently about all the emergency measures our govt has taken to try and keep the US economic Ponzi scheme going... after Disinflation, ZIRP, QE and Dollar Devaluing, we're left with what? about a quarter's worth of inventory restocking to squeeze some GDP from--i.e. 4q09.
"Strong Dollar policy" is political rhetoric. The dollar should be allowed to oscillate, as should many other economic indicators. Running Monetary Policy by focusing on isolated targets--like a strong dollar, inflation, or employment alone--is too static and frankly lazy. But that's the problem with having economists run the economy; their models are static, uncreative, and impractical. If economists are the black, then MBAs are the white, just so you know that neither extreme gets my stamp of approval.
That's a long-winded lead-up to my response for you: the govt knows that devaluing the USD is our last line of defense. That being said, you know how fuc#ed we must be for them to pull out that kind of weapon-of-mass-destruc...


On Oct 17 10:19 PM Paul from California wrote:

> Didn't anybody read the excellent article in the WSJ by David Malpass
> on October 8th? The title was "Devaluing Currency has never led to
> Prosperity." The title summaries it all.

Oct 18 12:56 PM