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How Much Higher Can The U.S. Dollar Go?
How Much Higher Can The U.S. Dollar Go?
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Let’s start our examination of the U.S. dollar (USD) by recalling the chart from my August 2014 essay, Why the Dollar Could Strengthen—A Lot. At that point, the USD had moved modestly off its lows, and had yet to challenge long-term resistance around 80.
Here’s the same chart of the Real Trade-Weighted U.S. Dollar Index now:
The USD broke out of its multi-year downtrend and soared above 100. Needless to say, the USD did in fact strengthen a lot. After that initial leg up, the dollar has remained in a consolidation range for much of 2015. Though it recently broke out of a wedge/triangle formation to the upside, it’s not yet clear if this is a definitive move higher or more consolidation.
Is the Dollar Rally Done?
So is the dollar rally done, or could it move higher?
The long-term chart above (Real Trade-Weighted U.S. Dollar Index) offers some clues.
Our first observation is that trends in the USD tend to last for some time, so if this rally follows the pattern of previous rallies, it’s unlikely to have run its course in one year.
Secondly, previous rallies paused for a multi-month consolidation period before launching upward for the second leg of the long-term rally.
Thirdly, the USD rose sharply to previous peaks and then round-tripped back to the 80 level.
This raises the question: How high could the dollar rise in this rally?
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These Currencies Could Be The Next To Tumble In Global FX Wars
These Currencies Could Be The Next To Tumble In Global FX Wars
Earlier this week, Kazakhstan moved to a free float for the tenge, prompting the currency to plunge by some 25%.
The move came after the country’s exporters could no longer stand the pain from plunging crude prices and the RUB’s relative weakness. China’s move to devalue the yuan was the straw that broke the camel’s back.
Here, summed up in one chart, was the problem:
This “may prop up growth in the country and help [the] fiscal sector to accommodate external pressures in case they continue to mount,” Deutsche Bank said, commenting shortly after the news hit.
In many ways, the decision to float the tenge (like the move by Vietnam to allow the dong to swing in a wider channel) is emblematic of what’s taking place in FX markets from Brazil to South Korea.
Shockwaves from China’s devaluation have conspired with sluggish global demand and an attendant commodities slump to wreak havoc on developing market currencies the world over. For Asia ex-Japan, the outlook is especially dire, as the PBoC’s FX bombshell threatens to undermine regional export competitiveness, put upward pressure on the region’s REER, and will likely serve to further depress demand from the mainland.
Idiosyncratic political events have only made the situation worse for the likes of Brazil, Turkey, and Malaysia.
Here are some brief comments from Citi:
Is this Asian Currency Crisis Part 2? It sure feels like it. It would be more accurate to call it the Great EM Deval-Meltdown as emerging market currencies are in freefall and another peg bites the dust overnight (Kazakhstan). There are few pegs left besides Saudi Arabia and EURCZK and both are under pressure. The 1-year SAR forwards are at 12-year wides and EURCZK is pinned to the 27.00 floor. Take a look at the white chart below right which shows Malaysian Ringgit and you can get a sense of the 1997/1998 crisis vs. now.
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Now Is The Time – Fear Rises As Financial Markets All Over The Planet Start To Crash
Now Is The Time – Fear Rises As Financial Markets All Over The Planet Start To Crash
Can you feel the panic in the air? CNN Money’s Fear & Greed Index measures the amount of fear in the financial world on a scale from 0 to 100. The closer it is to zero, the higher the level of fear. Last Monday, the index was sitting at a reading of 36. As I write this article, it has fallen to 7. The financial turmoilwhich began last week is threatening to turn into an avalanche. On Sunday night, we witnessed the second largest one day stock market collapse in China ever, and this pushed stocks all over the planet into the red. Meanwhile, the twin blades of an emerging market currency crisis and a commodity price crash are chewing up economies that are dependent on the export of natural resources all over the globe. For a long time, I have been warning about what would happen in the second half of 2015, and now it is here. The following is a summary of the financial carnage that we have seen over the past 24 hours…
-On Sunday night, the Shanghai Composite Index plunged 8.5 percent. It was the largest one day stock market crash in China since 2007, and it was the second largest in history. The Chinese government is promising to directly intervene in order to prevent Chinese stocks from going down even more.
-Over 1,500 stocks in China fell by their 10 percent daily maximum. This list includes giants such as China Unicom, Bank of Communications and PetroChina.
-Ever since peaking in June, the Shanghai Composite Index has dropped by a total of 28 percent.
-Even Chinese stocks that are listed on U.S. stock exchanges are being absolutely hammered. The following comes from USA Today…
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When Money Dies
When Money Dies
“When Money Dies” is the title of a 1975 book by Adam Fergusson, in which he describes the downfall of the Reichsmark in Weimar Germany. A fascinating look at that period of history, one can glean quite a few useful pieces of advice on how to survive a currency crisis. But “when money dies” could also describe the current currency crisis in Greece, in which many Greeks seem to have taken those lessons from Fergusson’s account of the Weimar hyperinflation to heart.
Even though the Greek currency crisis isn’t a traditional hyperinflationary crisis, many Greeks are trying to get their hands on, and then spend, cash. One of the fears is that bank depositors will be forced to take losses on their accounts, the so-called “haircut”. This happened in Cyprus to some larger depositors, but the fear in Greece is that people with even just a few thousand euros in their accounts might be forced to take losses of 30-50% or more. Just imagine that you have $10,000 in your bank account and overnight the government says, “Sorry, your account balance is now $5,000.” Overnight, the purchasing power of your bank account has been cut in half.
So even though the government isn’t printing more money (yet!), the fear of a 50% devaluation of the purchasing power of bank accounts is causing Greeks to line up at ATMs to withdraw money. And because there is the additional fear that Greece may exit the euro, with unknown consequences, many people seek to convert their euros into tangible goods. Shoes, handbags, refrigerators, gold, jewelry, anything that can maintain value and be resold or bartered is fair game for those desperate not to lose all of their hard-earned savings.
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Philip Haslam: When Money Destroys Nations
Philip Haslam: When Money Destroys Nations
The global debt glut, plus the related money printing efforts by the world’s central banks to try to stimulate further credit growth at all costs, leads us to conclude that a major currency crisis — actually, multiple major currency crises — are practically inevitable at this point.
To understand better the anatomy of a currency collapse, we talk this week with Philip Haslam, author of the book When Money Destroys Nations. Haslam is an authority on monetary history, and more recently, has spent much time in Zimbabwe collecting dozens of accounts of the experiences real people had as the currency there failed.
This week, he and Chris discuss the process by which a hyperinflationary currency collapse occurs:
In South Africa, there’s a river called Suicide Gorge where you can jump off from the top of a series of waterfalls. You jump off each waterfall, and you can then go down to the next. But the problem is, once you jump off each waterfall, you can’t get back up again. So we used this analogy to describe the process of hyperinflation.
Typically, as a government prints money, you get levels of inflation. But that’s inflation based on historic money printing. Every year, when you get your salary increase, you base it on historic processes. You take the latest consumer price index and then build it into your wage increases. If you’re a business, you’ll build it into rent increases and price increases of your products. But it’s all based on historic inflation.
…click on the above link to read the rest of the article…
We Live In An Era Of Dangerous Imbalances
We Live In An Era Of Dangerous Imbalances
The intervention by the world’s central banks has resulted in today’s bizarro financial markets, where “bad news is good” because it may lead to more (sorry, moar) thin-air stimulus to goose assets prices even higher.
The result is a world addicted to debt and the phony stimulus now essential to sustaining it. In the process, a tremendous wealth gap has been created, one still expanding at an exponential rate.
History is very clear what happens with dangerous imbalances like this. They correct painfully. Through class warfare. Through currency crises. Through wealth destruction.
Is that really the path we want? Because we’re for sure headed for it.
…click on the above link to view the video…
Turkey’s Central Bank Raises Ratio for FX Reserve Requirements – Bloomberg
Turkey’s Central Bank Raises Ratio for FX Reserve Requirements – Bloomberg.
Turkey’s central bank increased the foreign-currency reserve ratios required of banks and financing companies, after a month in which the lira was among the world’s worst-performing emerging-markets currencies.
The revision announced today is intended to make sure institutions can meet foreign-exchange liabilities. It would add approximately $3.2 billion to the central bank’s foreign currency reserves, the bank said in a statement on its website. The average reserve requirement ratio for foreign currency, now 11.7 percent, will rise to 12.8 percent, it said.
Turkish central bank Governor Erdem Basci warned Dec. 10 in Ankara that the bank would take measures against excessive short-term foreign currency borrowing by Turkish banks. The International Monetary Fund had urged Turkey to raise reserve requirements for foreign-currency liabilities in a report on Dec. 5, saying that reducing bank incentives to fund themselves in foreign currency would limit the risk of a balance-of-payments crisis.
Russian sanctions starting to bite into Canadian export outlook – Business – CBC News
Russian sanctions starting to bite into Canadian export outlook – Business – CBC News.
Canadian exporters stung by Russia’s currency crisis and its retaliatory sanctions against the West wonder what 2015 will hold for a market filled with promise less than 12 months ago.
Companies from farm-equipment manufacturers to pork producers spent much of 2014 adjusting to the economic instability in Russia, a country that bought $563 million worth of Canada’s agricultural exports in 2012.
For some firms, the first half of 2014 had the hallmark of a banner year — and then sales evaporated.
A senior executive for one of Canada’s biggest exporters to Russia said his company did about $250 million in annual business there in recent years, mostly selling frozen pork products.
Russia says currency crisis over, but inflation set to soar | Reuters
Russia says currency crisis over, but inflation set to soar | Reuters.
(Reuters) – Russia said its currency crisis was over on Thursday but warned that inflation is set to climb above 10 percent, adding to the problems facing President Vladimir Putin’s government as it fights its worst economic crisis since 1998.
The ruble plunged to all-time lows last week on heavy falls in the price of oil, the backbone of the Russian economy, and Western sanctions over the Ukraine crisis that made it near impossible for Russian firms to borrow on Western markets.
But it has since rebounded sharply after authorities took steps to halt its slide and bring down inflation, which after years of stability threatens Putin’s reputation for ensuring the country’s prosperity.
Those measures included a hike in interest rates to 17 percent from 10.5 percent, curbs on grain exports and informal capital controls.
“The key rate was raised in order to stabilize the situation on the currency market. … That period has already, in our opinion, passed. The ruble is now strengthening,” Finance Minister Anton Siluanov told the upper house of parliament on Thursday.
Belarus In Full-Blown Hyperinflation Panic: Blocks News, Online Stores; Bans All FX Trading For 2 Years | Zero Hedge
“We have to do something with these Belarussian rubles,” exclaims one Belarussian as she shops to turn worthless rubles (BYR) into physical assets. As AFP reports, The Belarussian currency was dragged down by the slide of the Russian ruble last week, leading authorities to impose draconian measures, forbid price increases even for imported goods, and warn people against panic. Now, however, in an effort to stem the flood of hyperinflating domestic prices, authorities have blocked online stores and news websites to stop the run on banks and shops as people scramble to secure their savings. One of the blocked news websites noted, it “looks like the authorities want to turn light panic over the fall of the Belarussian ruble into a real one,” calling the blockages “December insanity.” And indeed they have stepped up the insanity:
- BELARUS HALTS OTC TRANSACTIONS IN FX UNTIL 2017: INTERFAX
China pledges to help Russia overcome economic hardships — RT News
China pledges to help Russia overcome economic hardships — RT News.
China’s foreign minister has pledged support to Russia as it faces an economic downturn due to sanctions and a drop in oil prices. Boosting trade in yuan is a solution proposed by Beijing’s commerce minister.
“Russia has the capability and the wisdom to overcome the existing hardship in the economic situation,” Foreign Minister Wang Yi told journalists, China Daily reported Monday. “If the Russian side needs it, we will provide necessary assistance within our capacity.”
The offer of help comes as Russians are still recovering from the shock of the ruble’s worst crash in years last Tuesday, when it lost over 20 percent against the US dollar and the euro. The Russian currency bounced back the next day, but it still has lost almost half of its value since March.
At his annual end-of-year press conference on Thursday, Vladimir Putin acknowledged the ruble has been tumbling along with the price of oil, and estimated that Western sanctions account for 25-30 percent of the Russian economic crisis. However, the president’s economic forecast is that the slump will not be a lasting one.
Slumping Russian ruble threatens German economy – top exec — RT News
Slumping Russian ruble threatens German economy – top exec — RT News.
German companies doing business with Russia are suffering from the weak ruble, as one in three companies will have to fire employees or cancel its projects, the managing director of the Association of German Chambers of Industry and Commerce warned.
“The crisis of the Russian economy leaves behind an even deeper brake track in Russia-based ventures of German businessmen,” Volker Treier said in an interview with Bild am Sonntag newspaper.
The managing director of International Economic Affairs at the Association of German Chambers of Industry and Commerce (DIHK) revealed that “one in eight companies is considering withdrawing from Russia. So the breach in so many business relations is imminent.”
According to Treier, the weak Russian currency is hurting German businesses. Ten percent of German companies have said that their long-term Russian partners are turning away from Europe toward Asian markets.
China proposes broadening use of Yuan for trade with Russia: report | Reuters
China proposes broadening use of Yuan for trade with Russia: report | Reuters.
(Reuters) – China’s trade minister proposed more use of China’s currency in settling trade with Russia in the face of a falling rouble to ensure safe and reliable trade, Hong Kong broadcaster Phoenix TV reported on Saturday.
The rouble has fallen about 45 percent against the dollar this year, and suffered particularly steep falls early last week. President Vladimir Putin has declined to call it a crisis and said it would eventually rise again.
Chinese Minister of Commerce Gao Hucheng said the use of China’s yuan, or renminbi, has been increasing for several years but western sanctions on Russia had made the trend more prominent, Phoenix TV said on its website news.ifeng.com.
Gao said China and Russia were capable of achieving this year’s trade target of $100 billion. Last year, trade between the two gained 1.1 percent at $89.2 billion, according to Chinese customs figures.
BBC News – Belarus imposes duty on foreign currency purchases
BBC News – Belarus imposes duty on foreign currency purchases.
Belarus’s central bank has introduced a 30% duty on all purchases of foreign currency to try to protect its rouble.
Belarusian exporters will also be required to convert more of their overseas earnings into local currency.
The country is feeling the effects of the fall in the value of the Russian rouble, which reached new lows against the dollar this week.
The Belarusian economy is closely linked to Russia, which is its biggest trading partner.
The central bank said it had “adopted a number of measures aimed at preventing the development of negative trends on the currency and financial markets of Belarus.”
There were reports of some foreign exchange offices running out of money and queues forming at banks as people tried to withdraw money.
Russia’s parliament rushes through bill boosting banking capital | Reuters
Russia’s parliament rushes through bill boosting banking capital | Reuters.
(Reuters) – Russia’s lower house of parliament passed a draft law that would give the banking sector a capital boost of up to 1 trillion rubles ($16.5 billion) on Friday, part of measures to shieldbanks from Western economic sanctions.
Russia’s financial sector is reeling from the country’s slide toward recession and Western sanctions over the Ukraine crisis that have restricted banks’ access to international capital markets, driving their funding costs sharply higher.
The State Duma said on its website it had passed the bill in all three required readings – speeding up a process which can sometimes see laws languish in parliament for weeks.
