This is what markets were worried about nearly 5 year ago
When the Fed came to start thinking about tapering QE, the market had a big wobble. The fear back then was that the Fed tightening would create spill overs that would reverberate around the world and could be particularly damaging to EM’s. All of a sudden, we’re seeing that happen now. When you have central banks raising rates 700pips at a clip over a few days, that’s a sign of panic. The Fed were worried about this and were on watch for any signs of theses spill overs way back then, and their management of QE and rate hikes has helped to stop these big moves. So why are we seeing them now and why is the dollar flying now?
Perhaps it’s finally some real belief in the US and its economy. That’s also easier to believe now that the UK and Europe are seeing softness. The US may not be booming but it doesn’t need to. It just needs to be solid and steady, which is how I’ve been describing the US fundamentals for the last few years. The US may not be frying but it’s simmering like a slow cooking stew, and that’s security for investors.
These types of flows that we’re seeing can be huge. They can change the whole landscape for central banks and economies around the globe. It’s not the Fed’s doing, it’s the natural order of things but the Fed will feel some responsibility for it. They’ll look after the US first and foremost, and above all else but if this does continue, it’s likely to start factoring in to Fed thinking and that could be reflected in future language, if only as passing remarks in the first instance. That might be enough to give the market another pause for thought, like we saw with the FOMC.
If, and it’s still a big ‘IF’, this is the real start of a big dollar move, we’re only at the beginning and that could mean we in for some volatile times. Central banks around developing markets are going to looking at markets closely and thinking about making some tough decisions. What we’re seeing in Argentina may eventually just be the tip of the iceberg. As ever, we’ll have to watch how things develop but we know the clues to look for now.
To trade it, keep one eye on EM currencies, one eye on their central bank moves and one eye on the buck and the Fed’s language (Extra eyes are available in the ForexFlow online store π ). In this early instance the market may be seeing it as a risk-off scenario (hence why we’re seeing moves into the yen) but that might be the wrong line to take.
For me, I’m coming further around to the idea that we’re done with the USD bearishness of the last couple of years and I’m going to stick with dip buying USD at choice levels. We could well have our next big trend to jump on. For my long-held EURUSD longs, I’m thinking that this might be the end of the road soon, if not already. I’ve decided to get out if 1.1900 breaks and will have a stop under an old S&R area around 1.1880. I’m certainly not going to complain if it does end π If you followed musing during that time and others, you’ll know that looking for early signs of the big long-term trends is what I enjoy doing most, and I’m getting that tingling feeling for the USD dollar. Watch this space!
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have a great weekends, R
You too Q.
thank you ryan … music to my ear a long time bull thinking about the end of longs i trust he is smart and bailing out for a reason
I’m never married to a trade Harry, even when in one for a long time. From start to finish I’m always looking for a reason why the trade might be over. At the start of this year we put together a collective post about our views for this year. Mine was that I was still happy to stay in my EURUSD longs but it wasn’t going to be as plain sailing as last year. The signs are there now that some proper USD strength might be coming. It’s still a “might” though and I’ll be doing a lot of thinking and watching to see where we’re at.
i was with you when you started you first long told this in site many time that you are a big trader and i always take your choices under consideration …my point was to smart trader like you start thinking about it means i am on the right path
I hear you Harry and remember. You’ve got a nice head start so it looks like this time you might be the signal for when the trend changes ?
The pic makes me very uncomfortable, still I want to read your post anyway….
Thank you Ryan, for letting us see (and hear:-)) how you fell when you make a big U turn, great post as always.
me3
My pleasure Chen.
me2
good post Ryan … I think USD benefited a lot from recent EUR and GBP problems … now some EM currencies adding to it. I’m curious to see next week I think we could have a pause on USD. Mkt waiting for next data from EZ and UK to see if the Fed is the only soldier out there reg hiking rates. USD could give back a bit in that wait. But if we keep on seeing US inflation up and rest of the world inflation down … fireworks
Agreed 5M. I think it needs watching still so I’m not calling anything just yet. I’m happy to be a USD dip buyer right now on a short-term basis, even if I’m wrong about the longer-term. I’ll be having a good old think about it all from now on.
Markets are already calling the Fed, “Last man standing”. That`s money talk for watch out.
Just a quick question: Ryan, your long-held euro long did not take profit @double visited upon the high 1.25x level?!?
I did Jimbo. That was the last time I took some of the position off. I missed the first move but made sure I took the second one.
Great stuff mate. Going to be a fun ride whatever happens. Luckily you didn’t need any arrows for this post!
Hahaha
Great piece Ryan and much food for thought. I don`t know a lot about EM`s, excepting that Argentina as we see it now, we have seen a few times in recent years. It`s simply a very badly run economy. We could say they haven`t got a clue, but the truth is it`s a poor economy and relies only on oil.
Turkey is in a similar mould but nowhere near as bad.
EM`s hold enormous amounts of $ denominated debt. That is the source of their true demise. They are vulnerable to movements higher in the USD and external shocks. One of the reasons why POTUS wants a cheaper USD. A cheaper USD ensures that nations like China et al, don`t dump their treasuries. US multi-nationals still hold enormous treasuries holdings outside of the US and so the USD has to be managed around these lower levels where at all possible. These debt issued levels are still at all time record highs> US enjoys amongst the best growth rates out there but still low and fragile, as is the economy.
So the USD has to be managed lower for now.
You already know my thoughts. There is recession coming. As a rule, the US catches a cold and others catch it. This time it`s different imho. UK will go into recession first, followed closely by the EU and the US will take it`s turn. Investors can smell it. It`s just a matter of how soon. In the meantime and until we see more signs and the beginning of the panic, I remain the cheaper Dollar for now camp. When the panic starts, perhaps as early as later this year, In the meantime, it looks like trade the yield differential space until investors panic at some time. Then buy the USD at will.
Fed is the “last man standing”. That`s uppermost in investors minds.
The time to buy USD for the long haul is just before the last man standing calls a halt to hikes. Run to Dollar safety. Maybe later this year or early next year?
Sound and wise analysis as usual Si ?
I could tell them all about Josepf Schumpteter now Ryan. The man who invented the economic term/theory of “creative destruction”. to describe the way in which Capitalism works. This is at the heart of how real money works and jerks us all around. Real money, the “creative destructors” are in the best trades before anyone even suspects the trade is already on. We all just get the sweepings off the floor. Old Joe said “One of the problems with capitalism in it`s modern form is the speed and thoroughness with which creative destruction is at work in various ways, yet not in others such as banking, where large entrenched actors (real money) have so much power that they are able to prevent change (Volker rule et al?) and instigate change (the next big trade(s).
Follow the money, follow the Flow. Anyone know Blankfeins number? Jamie Dimons? Moynihan`s? π They know when it is. The next recession. They plan them π Allegedly of course.
“We all just get the sweepings off the floor” Ne’er a truer word spoken Si…