When Nixon’s treasury secretary told his European counterparts the dollar was “our currency, but it’s your problem”, he was referring to the tendency of foreigners to borrow and lend to each other using American money. The importance of these so-called eurodollars in other countries’ financial systems inadvertently gave American policymakers significant influence over credit flows outside their borders.
(This is still true: a rising dollar tightens financial conditions abroad, while a falling dollar encourages foreigners to lever up.)
Some Europeans wrongly thought this was deliberate and determined to rectify the situation by creating a competitor currency capable of functioning as a “global reserve”. A few even dreamed the euro would supplant the dollar. Read more
We missed this earlier this month, but it is worth a reprise.
How do you create a global reserve currency?
Some clues by way of a speech by Benoît Cœuré, ECB board member, earlier this month:
At constant exchange rates, the euro’s share of global foreign exchange reserves has remained broadly unchanged since 2007-08. The decline in 2014 in the share of the euro at market exchange rates was a reflection of the depreciation of the euro. There is therefore no evidence that global foreign exchange reserve managers actively rebalanced their portfolios away from the euro in 2014, or in 2011-2012 for that matter. This year the euro has been increasingly used as a funding currency by international borrowers, owing to the historically low interest rates in the euro area. Investment-grade corporations in advanced economies, mainly the United States, were particularly active issuers of international bonds denominated in euro, whose proceeds are swapped back into dollars. In April 2015 Mexico became the first sovereign state to issue a bond denominated in euro with a maturity of 100 years. Moreover, the share of the euro as an invoicing or settlement currency for extra-euro area trade remained broadly stable again last year. Finally, the euro is used as a reference currency for the anchoring of exchange rates, mainly in countries neighbouring the euro area and countries that have established special institutional arrangements with the EU or its Member States.
General collateral rates are known to get volatile as banks scramble for liquidity ahead of the quarter’s close.
But this March 31, GC rates didn’t just get volatile. They went positively paraobolic.
According to Bloomberg Data, the overnight US dollar GC rate more than doubled to 0.45 per cent, a rate not seen in the markets since October 2012. They fell back to 0.2 per cent range on Wednesday, implying there’s no systemic threat to talk about, but the spike does prompt questions over how and why a funding mismatch of this level might have come about. Read more
Quite a bit of motion sickness in the world of FX on Thursday, with the sharp pullback in the dollar that followed Chair Yellen’s dropping of the Fed’s “patient” pledge on Wednesday now all but reversed…
Is this nuts?
…the speed of the Euro depreciation is starting to look very fast. We are in the 99th percentile (at least) of 3M, 6M, 9M, and 12M moves since initiation in 1999.
- Nordvig, Nomura
Over the last eight months the USD has appreciated faster on a trade-weighted basis than at any time in the last 40 years and probably over a longer, much longer duration.
- Englander, Citi
Which, again, looks like this: Read more
In one of our previous post about petrodollars, we cited BoAML on how nobody really knows how the petrodollar shadow liquidity flows through the global economy, apart from the fact that eventually they end up being repatriated to the US via investments in domestic stocks or bonds (both public and corporate).
It’s a point worth bearing in mind in the context of this working paper from the BIS’s Robert McCauley, Patrick McGuire and Vladyslav Sushko, from January, previously covered by Matt. Read more
You may have noticed that a US dollar goes a lot further in much of Europe than it used to. In fact, it goes about 25 per cent further. From our colleagues at FastFT:
A while back we proposed that oil prices are more interest-rate sensitive than most people appreciate.
The logic goes as follows.
When interest rates are low it makes more sense for producers and commodity owners to hold their wealth in commodity-form rather than in money-form — especially if speculators are prepared (via the forward curve) to compensate them for the cost of storing these commodities in terminals, tanks or even in the ground.
Low interest rates thus support commodity prices because they encourage commodity owners to sell only what they need for financial liquidity purposes and little more, a fact which naturally keeps the market tight. Read more
Some thoughts on the recent dollar rally. See this post for more on the supporting arguments.
Jens Nordvig of Nomura reports a frequent question from clients: can the recent dollar rally turn into a big change in the currency’s value, similar to those that occurred in the 1980s and 1990s?
Answer: maybe, but it is worth remembering just how big those dollar moves were. See if you can spot them in the long term dollar index chart:
From BofAML’s David Woo, with our emphasis:
A major consensus this year was that this was going to be a rates-centric year. Eight months into the year, many investors continue to believe that with QE3 winding down, all markets will be taking their cues from the US rates market sooner than later. Currency investors are no exceptions. USD bulls have built their investment thesis on the assumption of higher US rates and have been waiting for rates to climb to establish or add to long USD positions.
On Sunday Pimco issued an intriguing tweet from Bill Gross, the undisputed King of the bond mountain.
This was Paul Krugman’s guess about what a debt-ceiling fueled government shutdown could lead to:
I’m not at all sure that we’re looking at an interest rate spike; maybe even the opposite. But for sure we should be looking at a plunging dollar, and probably carnage in the stock market too.
Courtesy of Deutsche Bank, here’s the latest change in net dollar futures positioning as of last week: Read more
According to Nomura, since 1980, there are only two periods of economic divergence — between the US and Europe and the UK — comparable to what we are observing currently.
Thanks to Monument Securities’ Marc Ostwald for directing our attention to an interesting report from MNI on Tuesday regarding changing attitudes to the renminbi:
The PBOC made a “big mistake” in letting the yuan rise so quickly earlier this year because it has only swelled the level of foreign exchange onshore, creating potential problems when depreciation expectations rise and capital starts flowing out of the country, regulators contend. Read more
Another day, another Aussie GDP downgrade.
From BofA Merrill Lynch: Read more
That’s recession and the merest hint of the word sends Australian policymakers in to paroxysms of anger.
For example, here’s David Gruen (the Treasury’s chief macroeconomist) speaking before a Senate hearing last week.
From the Sydney Morning Herald: Read more
The pain goes on for the currency dubbed until recently the southern Swiss Franc…
We are, of course, talking about the Australian dollar — now going head to head with the Syrian pound for the title of the world’s worst performing currency.
The latest drop follows a call from Pimco of even lower interest rates. Read more
Dear everyone, this article is based on a questionable premise: that the dollar is about to head off on another bull run. We know this may not happen. Thanks, us. Read more
You gotta roll with fashion:
For US dollar pairs at least…
There’s basically nothing happening. Sure we’ve got plenty of rhetoric, a Swiss franc floor and QE — but FX volatility is touching recent lows:
This is just a lovely chart from the FX team at HSBC (click in to see — tis just too big for an excerpt to handle):
What it, and its fellow soon to be introduced below, do is call further into question the US dollar’s status as a haven currency; one which will benefit in periods of risk aversion. They do so by looking at the performance of G10 currencies against the S&P500. It’s a timely query considering the approaching fiscal cliff… and, well, lots of other stuff. Read more
The glacial pace of FX reserve change continues, as documented by the IMF ’s “Composition of Official Foreign Exchange Reserves” data which was released on Friday.
Summary: the dollar is still reluctantly loved, the euro is ‘confused’ by the Swiss and everyone is as deep into the ‘others’ as they can be… which isn’t far. Read more
When commentators cast around for reasons to explain the strength of the Australian dollar in the face of falling iron ore and coal prices they all arrive at the same answer - haven bond buying by central banks/ sovereign wealth funds. In fact, we’ve also made that very point.
The pace of reserve accumulation may have been slowing over the past few years — although that also reflects movements in the value of currencies within the portfolios, particularly the dollar — but there are good reasons to suggest it may be picking up again:
With apologies to Russell: a stronger euro may well sit within the set of things that weaken the euro.
Or, to put it even more circularly, if the single currency gets stronger, then the eurozone’s economic recovery gets harder — and thus the measures that are taken, ostensibly, to shore the euro up run the risk of doing it damage by undermining its longer-term existence. Read more
(Chart from RBC Capital Markets.) Read more
QE3 has set the dogs of FX verbal intervention loose (well, looser anyway) and it seems probable some actual shots may be fired in the coming while.
Bank of New York Mellon’s alliterative Neil Mellor pointed to Brazil, where the central bank was the first to pass comment on the Fed’s move (with our emphasis): Read more