Investors pay up to $60,000/yr. for the same advice we give regarding the U.S. dollar

Watching Global Flows Explains Why the Dollar Won’t Be Kept Down
A strong dollar begets higher USD-based asset prices, which begets a stronger USD

Note: As the defacto reserve currency, the U.S. dollar has been well-supported in the global currency market. Despite calls for its demise, for the past three years I have explained why the dollar will remain firm and that dollar-based assets would continue to outperform.

  • Overseas investors borrowing in U.S. dollars are effectively shorting the greenback. As long as the global credit markets remain tight, conditions favor a strong dollar.
  • Although the U.S. Fed has modified its policy course, dollar yield differentials vis-a-vis other  currencies are noteworthy. This provides a great opportunity for a profitable carry trade.
  • Moreover, this analyst’s explanation of the Chinese yuan’s limitations agree with our previous analysis.
  • Global investors are more confident parking cash on an unhedged basis in the USD. This creates dollar-based asset inflation. Domestic investors feel less of an urgency moving money outside the U.S.
  • Since late December when the Fed stepped into the process, global investors breathed a collective sigh of relief and the global markets have once again begin to turn around.
  • My concern is that these emerging market rallies may not be able to grow much higher. I have to conclude that the elites are telling all the front men (e.g. Trump, Schumer, Powell, Draghi, Jinping, etc.) to do what it takes to support asset prices. They are all marching to the same tune right now, which I find peculiar.

I wanted to pass along this Bloomberg article titled, Watching the Global Flows Explains Why the Dollar Won’t Be Kept Down, which explains the U.S. dollar’s resilience despite the U.S. Fed’s policy changes. Notice that the firm of the person interviewed charges up to $60,000 a year for its analysis on global monetary flows.

The dollar’s resilience after what some have categorized as the most dovish Federal Reserve turnaround in history comes as little surprise to Exante Data’s Jens Nordvig.

U.S. President Donald Trump may be looking to jawbone the greenback. But for Exante, it’s still all about the grab for yield, with rates on dollar-denominated assets remaining more attractive relative to the painfully low or negative ones found in Europe and Asia. The firm’s analysis of the holdings of global asset managers suggests that isn’t going to change anytime soon.

“People are using the dollar as the long in the carry trade, with European investors still having very little to buy at home that they can accumulate yield in,” said Nordvig, who launched Exante in 2016. “You can absolutely see this in the global fund flows we track. It really explains the dollar holding up in the face off this U-turn by the Fed.”

Watching the Global Flows Explains Why the Dollar Won’t Be Kept Down – Bloomberg, March 6th

If the global economy weakens, the trend is your friend
While I doubt any rally will be long-lasting, emerging market currencies have rallied off their lows (gratis Fed policy). The supporting forces of the dollar remain inatact and if the global economy continues to fade, this trend will reverse.

There are always trading opportunities in Chinese-yuan assets, but notice how this analyst approaches the yuan trade. They conclude that it is a special case currency. This is why the yuan has not been able to become a go-to currency reserve.

Another value of Exante for Verde is what Nordvig’s team and its indicators can tell them about the intricacies of foreign-exchange dynamics in China.

This is important because the yuan is a “heavily-intervened currency and China is a country where there are massive capital controls and a lot of opacity in terms of what is really happening”…

Watching the Global Flows Explains Why the Dollar Won’t Be Kept Down – Bloomberg, March 6th

If the Fed comes through on its promise to begin purchasing Treasuries again and starts to cut the Fed funds rate, I still look for the dollar to be well-supported. There are no other viable alternatives and any dovish Fed policy changes would be met with dovish policy changes at the ECB, BOJ, and PBOC.

While the emerging markets have begun to turn around, they are still a way from their former near-term highs. If the credit markets quiet down, we could see a further rally in emerging market assets.

My one final observation; I notice how all the political decision makers are beginning to all come together to support asset inflation. My concern is that the elites are telling all the front men (e.g. Trump, Schumer, Powell, Draghi, Jinping, etc.) to do what it takes to support asset prices. They are all marching to the same tune right now, which I find peculiar. We will keep our eyes open.