Post on 10-Jan-2017
Currency Wars01 April 2016
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Scenario: Currency Wars
Currency Wars
NEW
HiddenLevers
MARKET UPDATE
Obesity lifting healthcare spending
over HousingCUT CUT CUTCUT
Market Update
sources: HiddenLevers, World Economic Forum, Marketwatch, WSJ
1
2
Oil Majors cutting new exploration
3
Brightest no longer US locals
Fintech Update
sources: HiddenLevers, Investment News, FINRA, KPMG
Schwab ends boondoggle with Salesforce
FINRA report cites Robo shortcomings
201513.8b USD poured into Fintech (2x 2015)(6x 2011)
HiddenLevers
US DOLLAR ANALYSIS
USD Analysis: Long Term Trends
sources: HiddenLevers, TradingEconomics
• Relative moves in interest rates matter – the Fed’s moves relative to others• Dollar peaks have come at both the middle and end of stock market cycles• Dollar has short term bounces during market fears, but doesn’t last
Gold Standard Era
Fed Hikes ratesto fight inflation
US BudgetBalanced
Fed cuts rates from6.5% to 1%
No lasting rallyon fear trade
USD Analysis: Recent Trends
USD vs 12M Yield: divergence
sources: HiddenLevers
Phase 1
USD up post QE
No risk premium
Phase 2
USD Flat
Too much Oil
Phase 3
USD/OIL inversion returns
USD vs Oil: back to normal
HiddenLevers
CURRENCY WARS: FED HALTS HIKES
Fed: Policy Impact on USD
sources: HiddenLevers, Bloomberg, CNN
QE 1 QE 2 QE3 TaperRateHike
Rumors
Rate Hike
• QE 1 + 2 pushed USD down• QE3 could only keep USD flat• End of taper allowed USD to rocket up• Buy rumor, sell news: rate hike arrival USD mild reversal
Fed: Recent Decision on 4 Hikes 2 hikes
sources: HiddenLevers, CNN, Quartz
Negative
All criteria met for hike and no raise = Fed losing credibility
Fed out of ammo – cant really lower rates or do more QE
USD down in Feb = Market knew before Fed said it out loud
Positive
Fed woke up to deflation as bigger threat to US economy, not inflation
Fed realized it can’t raise rates with rest of world lowering into negative territory
Inflation flat
Labor force uptick
GOOD: Fed halts hikes
source: HiddenLevers, CNN, Financial Times
Fed dovishness continues in a negative rates world
Return of usual S+P / USD
inverse correlation
Fed joins central banks insanity
with easing
Commodities sail up
HiddenLevers
CURRENCY WARS: BREXIT
Brexit: Europe impact on UK
sources: HiddenLevers, BBC,; Economist
EUR
GBP
27 May 2015 Brexit referendum announcedGBP falls 13% on Brexit fears
23 June 2016Brexit vote Polls evenly split among Brits
Brexit: Pound’s Impact on USD
sources: HiddenLevers, Bespoke Investment Group
GBP and USD move inversely, but huge divergence began in mid-2014 with giant dollar rally
USD -2%
GBP -9%long term
short term
GBP + USD move inversely, but huge divergence began in mid-2014 with giant USD rally
BAD: BrexitBritain exits the Europe, creating GBP flight
source: HiddenLevers, Citi Research
Downside impact likely
regional
UK departure opens the door
for others
Money leaving Pound chooses USD over EUR
HiddenLevers
CURRENCY WARS: CHINA YUAN CRISIS
China: Slowdown Update
sources: HiddenLevers, WSJ, BBC, Chinese Bureau of Statistics
slowest econ growth in decades
Bad loans exceed 2008 US subprime
Mass domestic outflows to US/UK/AUS
real estate + equities
$800b Jan stimulus NO increase in sales
or production
China: Yuan Devaluation Dilemma
sources: HiddenLevers, WSJ,
China ReservesHigh mark = 3.3 Trillion USD2015: 513b spent defending YuanYoung govt never experienced floating Yuan
Defend- Bolster domestic consumers- Save face abroad
Devalue- Bolster exporter companies- Conserve USD reserves- Doesn’t stem capital outflows
Should China defend Yuan or devalue?
UGLY: China Yuan Crisis
97 Asian crisis -10% S+P
-50% currencies
source: HiddenLevers
Fierce USD rally kills
commodities
Amateur govt mismanages Yuan deleveraging
China 20162x
Asia in 1997
China exhausts USD reserves
Scenario: Currency WarsGood:
Fed stops hiking
Bad:Brexit
Ugly:Yuan Crisis
USD Index
+11%S&P
-15%
USD Index
+4%S&P
-4%
USD Index
-10%
Fed continues the easy money policy on low inflation and foreign woes, stoking equities higher.
The UK votes to leave the EU, with negative impacts for the Pound, Euro, and regional stock markets.
China is forced to devalue its currency, leading to a new Asian currency crisis, with worldwide ripple effects.
S&P
+11%
Currency Wars – Take Aways
China devaluation big risk, Brexit small risk
Renewed Fed dovishness pumps market but for how long?
USD huge impact on commodities, less so on S+P
Fed stuck here on rates.