Dollar didn’t collapse even the Fed is running a printing machine 24/7, because dollar is the reserve currency, risk hedge, settlement currency, the game over of yen carry trade…Yes, all those. Now what…what’s affecting the dollar supply and demand that not many IB reports usually cover?
1) Yen carry trade is back again.
First, I mentioned earlier this year, that those boys still have a breath after the yen carry trade collapse have come back to life and started all over again. Got to thank the Japanese, The carry trade has provided traders with a reliable source of near-endless funds for many years. This pool of capital has helped fuel the 2002-2007 bull market. Since 2002, the Yen has been trading down against the dollar. Traders have been shorting the Yen and using the funds to purchase stocks, currencies and high-yielding securities around the world.
The events have turned in 2007, the unwinding resulted stronger yen and killed Japanese GDP and supported dollars. So now since the game is back, against yen, dollar should appreciate, not just this year, several years going forward.
2) Re leverage and reallocation
Lately some research shows that now asset managers, HNWs etc have over 22% in cash, well, this is quite high historically speaking, and thinking about the situation we're in, not just the Fed, every country literally have been doing what we call “competitive devaluating the currencies” or monetization of debt, so dollar happily have no counterparty to fall MUCH against, but this situation will make the cash holders uneasy, holding euro or dollar don’t differ that much, what’s 10% currency yield difference for several years, while you lose the purchasing power? So the cash will transform into capital flow into the counties that have natural resources, that I believe, So if Citic pacific can really hold their positions, which they couldn’t, I believe they can make it all back, yes I begin to love Australian dollars now, same view with UBS in commodity currencies.
3) Why dollar market won't crash
Aside from the obvious reasons that we know “don't hope for elephant to fall”, because there will be consequences, if dollar tumbles, or sth happens to the almighty America, you don't really expect there’s still peace left, all the cruisers and air craft carriers won't be just happily strolling in the sea. And you know that one of the very important criterias S&P used for country rating ratings is military power, so when you have the big gun, people tend to trust you’ll honor your own coins. Therefore dollar is risk hedge and always will be.
Last, share sth that not many people know. Some folks said that when we see the USTs auction start to have low coverage ratio, usually 2-3x now, there will be the first signs of US dollar trouble/crisis, because it shows people don’t trust the US government anymore. Good idea, but it’ll never happen, partly because the Fed will always be the last resort, also very importantly, the central bank currency swaps, the money exchanged by central banks later used to settle international trade, this is what I see the most important source of manipulation going on, and it will go on and on, like my heart will go on… the song…