The eventual unraveling of QE; A quick update on the currency markets

The USDX has touched resistance at the long-term high of the 50-week mva

If the current course of circumstances in the currency markets continue, we can see a blow off top of the USDX at the 115 to 120 area. The resulting distortions in the global markets could be catastrophic to the QE experiment in the EU and Japan, with brutal ripple effects felt throughout the rest of the Western world and China as well.

Based on the dynamics and relative underpinnings of the national economies and resources, I have to conclude the USD will be the last man standing in the QE experiment. The whole irony with creating a BRICs currency is that the dollar could be so expensive, which would mean the economies of the BRIC nations will enjoy such an enormous competitive advantage versus the dollar, that they will just find it more expedient to continue using the USD. If the BRIC nations attempt to create a transnational currency now, it could create undo demand on their own currencies in making them transaction cross-border-based currency(ies). Thus they could risk losing that competitive advantage.

Moreover, the primary stumbling block for the BRICs in their ostensible endeavor is that no one nation is willing to run trade deficits. If all are ultimately competing against each other in their export markets, where will the needed currency for trade come from? This has been the BRICs conundrum for the past 20 years, when the idea was first entertained.

Furthermore, if the dollar continues rising, it risks setting back the recent increases in American manufacturing capacity. I am concerned with an ultra strong dollar will force many domestic manufacturers to continue taking the risk to source outside American borders, especially with mainland China.

If the Euro continues falling here, the Euro nations are going to find it very tough to find enough nat gas this winter. It’s a self-feeding cycle that is continuing to support the US dollar at the expense of the Euro and yen. The Canadian dollar should hold up fine as it is a energy commodity currency and produces energy in enough abundance.

I think of the wild cards here and contemplate what the nation of Columbia will look like with its sharp shift to the left. Petro promises to shut down the entire energy sector, and I have to consider all of this not coincidental. The timing is too strange to ignore. All these circumstances support the greenback. The Russian war even supports the dollar as much of the world is drawn to the dollar as a substitute for American sourced commodities and relative yield advantages versus the rest of the developed world.

Conclusion: The global circumstances have changed so quickly and decidedly in the favor of the USD, the markets have not yet caught up to these sudden and drastic changes. I suspect that the USDX has more to go before the Fed gets involved to mitigate the dollar’s strength.

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10 thoughts on “The eventual unraveling of QE; A quick update on the currency markets

  1. Holy moly!

    CPI up 1.3% last month.

    Wage slaves lost 1.0% in real wages last month.

    Nothing in this report is good.

    Rent equivalent was up 0.7%, rent up 0.8%. The highest in over 35 years. I know that higher mortgage rates sock it to the prospective buyers, which is why the poor slabs with their FHA loans can still buy these properties, but these rents increases really help to support sfr prices. It’s good to have an asset in which it’s cash flow can keep escalating.

    USD very bullish as the Fed will keep raising.

    1. With the Dutch govt killing farms (& food production) seems like food prices are going to keep feeling heat. If the fed (as promised) tries to fight expropriation & the introduction of the green agenda by raising rates — where does it end? Similar could be said for oil. Seems to me like a classic manufactured crises.

      If you were renewing a mortgage right now would you float it or lock it in on the assumption of sustained increase of rates

      1. I take out loans based on my holding assumptions. I prefer 5-year loans for my type of stuff as I typically do stuff to negate the 30-year fixed rate. For owner occupied, i prefer longer durations.

        As for where it ends? I say it can go on and on. I just uploaded a post based on the thought. Some interesting and unique findings….

        Viva la asset owners!

  2. Peak inflation?

    Computer chips face toilet paper hoarding moment as shortage turns to glut

    A supply chain crisis triggered by the global pandemic deprived makers of PCs and smartphones to cars of computer chips needed to make their products.

    All that suddenly changed over three weeks from late May to June, as high inflation, China’s latest COVID lockdown, and the war in Ukraine dampened consumer spending, especially on PCs and smartphones.

    Chip shortages turned into a glut in some sectors, taking Wall Street by surprise. By late June, memory chip firm Micron Technology Inc (MU.O) said it would reduce production. The market reversal caught Micron off guard, admitted Chief Business Officer Sumit Sadana. read more

    As U.S. chip earnings reporting season kicks off later this month, TechInsights’ chip economist Dan Hutcheson warned of more bad news following Micron’s grim forecast. “Micron kind of plowed the ground, with their honesty,” he said.

    1. I think the real cause of the “chip shortage” was cryptocurrency mining. As soon as cryptocurrencies started crashing, GPUs became much more widely available. Now, the shelves are full with discounts galore. Nvidia is contemplating delaying the release of its new graphics cards due to the surplus.

      The mainstream media rarely talked about cryptocurrency mining as a cause of the “chip shortage” because it didn’t fit their SoS talking points about Covid causing long term disruptions. Do the oil shortages and “everything shortage” have the same story as the chip shortage? I have seen some anecdotes from people in the oil industry saying that the storage tanks are full.

      But as you’ve said, manufactured and fake crises are still real in this Talmudic world. If the SoS is insisting on a flu reshaping the world’s economy, then they will get it done, no matter how absurd the pretext. The “chip shortage” will probably continue as a way to justify keeping electric cars expensive. Gas stay elevated as long as the SoS continues the Russia/Ukraine war, forcing people to just stop driving and move to denser urban areas. Goal achieved.

  3. “.. if the dollar continues rising, it risks setting back the recent increases in American manufacturing capacity. I am concerned with an ultra strong dollar will force many domestic manufacturers to continue taking the risk to source outside American borders, especially with mainland China.”

    Not if China continues it’s trajectory based on “zero-Covid”.
    CCP appears more than willing to sacrifice the economy for The Great Reset and their share of the pie.

    Dr. Fu is China’s Dr. Fraudci

    1. It seems crazy what they are doing in CCP land. I think the CCP is gearing up for their next phase. Plus it seems Xi is looking to become an emperor for life and he wants total compliance as he seeks his goal.

      I have to believe the dollar is also this strong because of what you say here. There is a sense of urgency by corporate management to restyle manufacturing regardless of what happens to the dollar.

    1. It depends, but in this case it definitely is hurting stocks. Large firms that earn money overseas take a big hit as they bring it back into dollars. The high dollar right now is also exposing some glaring financial and economic maladies. I have always thought that the USDX in the low to mid 90s was the best area for the dollar.

      Currently, it also shows the large yield differentials and the winners vs. losers in the multipolar split currently underway.

      In the flip side, commodity prices are lower than they could be as they are mostly priced in dollars. A weak dollar could mean much higher prices than we see now.

      If the dollar keeps rising I am worried the BOJ could own the entire sovereign debt market.

      In the 2008 bust, the dollar tanked just before QE as the market thought the USG was going insolvent. That of course is no longer a concern.

      So, under the current scenarios, yes. Our hope is to see it fade lower again.

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