Currency Wars01 April 2016

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US Dollar Analysis

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.