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Deutsche: “Nobody Can Understand What’s Going On With The Dollar… The Answer Is Simple”

Tyler Durden
February 16th, 2018
Zero Hedge
Comments (13)
Read by 6,420 people

This report was originally published by Tyler Durden at Zero Hedge

dollar-crash3

Earlier this week, the bizarre, unexplainable, ongoing plunge in the dollar and US bond prices in the aftermath of the stronger than expected CPI print which also sent equities surging, prompted at least one trader at Citi to explode: “Wake Up Folks, It’s Not Risk Positive

Then again, maybe it is not all that unexplainable.

As Deutsche’s FX strategist, George Saravelos, writes, he has been getting numerous inquiries as to how can it be that US yields are rising sharply, yet the dollar is so weak at the same time?

He believes the answer is simple: the dollar is not going down despite higher yields but because of them. Higher yields mean lower bond prices and US bonds are lower because investors don’t want to buy them, or as he puts it “this is an entirely different regime to previous years.”

Below we repost his simple explanation, while highlighting that maybe…

… just maybe, the bottom for the dollar is now in?

From Deutsche Bank:

Blame the dollar on yields

We are well into 2018 and our feedback from recently attending the TradeTech FX conference in Miami is that the market is still struggling to understand or embrace dollar weakness. How can it be that US yields are rising sharply, yet the dollar is so weak at the same time? The answer is simple: the dollar is not going down despite higher yields but because of them. Higher yields mean lower bond prices and US bonds are lower because investors don’t want to buy them. This is an entirely different regime to previous years.

Dollar weakness ultimately goes back to two major problems for the greenback this year. First, US asset valuations are extremely stretched. As we argued in our 2018 FX outlook a combined measure of P/E ratios for equities and term premia for bonds is at its highest levels since the 1960s. Simply put, US bond and equity prices cannot continue going up at the same time. This correlation breakdown is structurally bearish for the dollar because it inhibits sustained inflows into US bond and equity markets.

The second dollar problem is that irrespective of asset valuations the US twin deficit (the sum of the current account and fiscal balance) is set to deteriorate dramatically in coming years. Not only does the additional fiscal stimulus recently agreed by Congress push the fair value of bonds even lower via higher issuance and inflation risk premia effects, but the current account that also needs to be financed will widen via import multiplier effects. When an economy is stimulated at full employment the only way to absorb domestic demand is higher imports. Under conservative assumptions the US twin deficit is set to deteriorate by well over 3% of GDP over the next two years.

The mirror image to all of this is that the flow picture into both Europe and Japan has been improving dramatically anyway. We have previously written about the positive flow dynamics in Europe as the flow distortions caused by extremely unconventional ECB policy are starting to adjust. But the Japanese basic balance has also shot up to a 4% surplus in recent years helped by a big improvement in the services balance (Chinese tourists) and a collapse of Japanese inflows into the US: treasuries simply do not provide enough duration compensation any more. To conclude, embrace dollar weakness, it has more to run.

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Author: Tyler Durden
Views: Read by 6,420 people
Date: February 16th, 2018
Website: https://www.zerohedge.com/

Copyright Information: This content has been contributed to SHTFplan by a third-party or has been republished with permission from the author. Please contact the author directly for republishing information.

13 Comments...

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  1. Anonymous says:

    A weaker dollar is a good thing, it makes it cheaper to sell them goods and more expensive to buy their goods.

    This encourages our development of new wealth in the form of increased domestic manufacturing and employment instead of the depletion of it that we have been seeing for the last several decades.

  2. Heartless says:

    Good points in the article. No one wants to buy our bonds because they are worthless. As most investors with half a brain also are coming to realize also consider the dollar to be without real value. As they see the stock market soar, they realize that the same ‘loaf of bread’ still has the same number of slice, the same thickness per slice, same bag, same taste and nutrition; but, it just is somehow now costing more. The bread has not changed. The value of the currency is less. You can apply that across the entire manufacturing spectrum in this country. We hear talk of upgrades and investments – but they for the most part have NOT happened yet. Same old machines cranking out the same old…. ‘bread’ … for more money to the consumer. The dollar is sh*t anymore. Today’s millionaire is no different than a 1/4 millionaire in the 70’s if you compare the cost of bread then to now.

  3. Menzoberranzan says:

    The dollar will disappear into nothing which is what it is. Got gold and silver in your pockets? I damn well do.

  4. rellik says:

    This article made me run to my books covering Micro and Macro economics.
    I will be happy to sell you a dozen “organic”
    eggs for $3.00, a pig for $100, a cow for $1200.
    I just paid my property tax in dollars.
    I could really care less what German,
    Russian, or Chinese people think my dollar
    is worth.

    • rellik says:

      Just to correct.
      My piglets are $100,
      once they are weaned.
      My #1500 steer is $1200.
      My heifer, Luna, is not for sale,
      she will make lots of baby
      cattle.
      I prepare.
      This must really mess with most
      peoples idea of what Hawaii is.
      Aloha

  5. LISTEN CLOSELY says:

    “We’ll Kill the Dollar!”

  6. One reason I like this site is because of the input from posters with good ideas in prepping, many of which help to stretch a dollar.

    It’s not just spending money on stuff. It is also about how Wise is each dollar spent.

    If only our tax dollars were spent improving our Country instead of wasting it on foreign aid, wars that don’t benefit our people, and corruption. We would have strong bridges, roads of gold, and more clean fresh water in our state-of-the-art reservoirs; pristine hospitals, and no crime.

    But at least we have this shtfplan.

    _

  7. Sean says:

    There are about 11 trillion dollars, electronic and physical, mostly electronic, in circulation in the US at any given time. A great deal of the physical dollars are sitting in the various banks that comprise the Fed. Their balances are around 4 trillion in cash, that they will admit to. It’s more likely double that. There are over 33 trillion dollars circulating overseas, or mostly sitting in foreign banks, a lot of it petrodollars, but most is cash from nearly 50 years of dollar demand and usage. The British, the Japanese, the Chinese, and everyone else who has been underwriting our debt for all that time, are swimming in both T-bills and cash. Sooner or later, someone of these debt holders are going to get nervous about the dollar weakness, and dump their dollars AND their T-bills in order to get some value before it’s all gone. Inflation the likes of which no one has ever seen. Prepare ye.

  8. Bert says:

    NOBODY CAN UNDERSTAND THIS…. This debt spending will continue until the easy oil is gone. If oil is plentiful, the year 2050, you may see a national debt of $100 Trillion, no big deal as all the products and assets ever created within the USA have a value dozens of multiples higher!! No dollar or stock crashes as all this debt money goes through Wall Street, DOW 100,000 S&P 20,000. No crashes!! Corrections, yeas you’ll have numerous short term 10% corrections, only to be followed by higher highs.

  9. Marie in Upstate says:

    Speaking of the dollar, I am re-posting this since it’s important. I posted it a week ago but it was in moderation for 2 days and finally posted 5 new threads later.

    At this point I think most of us critical thinkers have accepted that Trump is not going to MAGA. America as we know it will be destroyed (as evidenced on the reverse of every U.S. one dollar bill), and out of the heap of chaos and ashes will arise a New World Order.

    If you look at any one dollar bill you’ll see the Latin words on the seal, “Annuit Coeptis” which means “Announcing The Birth Of” and “Novus Ordo Seclorum” means “New World Order.” Annuit Coeptis is one of two mottos on the reverse side of the dollar bill. Broken down and individually the Latin “Annuit” is to nod/approve and ‘Coeptis” translates to commencement or undertaking.

    The overall and complete message is “Announcing the birth of the New World Order.”

    The date in Roman Numerals is 1776, the year the modern Illuminati was formed and also the year of American independence. The Latin “E Pluribus Unum” means “One out of many” (that is, order out of chaos) which is the foundation of the New World Order’s plan to unify the world’s governments, religions and money systems into one so the world can be controlled.

    In order to unify the world’s governments, religions and money systems into one so the world can be controlled that had to create a divisiveness, leading to chaos, (and out of the heap of chaos will arrive a NWO) and divide us, (‘Divided We Fall”) so that we could be conquered.

    If Trump wasn’t on board with all of this and the upcoming cashless society he would never have been selected for the presidency.

    • Marie in Upstate says:

      ^ Submitted post early Friday (2/16) evening at 5:00pm and in moderation until 11:00am Monday (2/19) morning.

      Meanwhile, all of the other posts on this thread were posted within hours and in the meantime there are eight new threads.

  10. Chilly McGwillis says:

    What many of us get for an hours pay will not buy a decent meal. That’s my indicator.

  11. 2018 Is Now says:

    This debt spending will continue because that is THE PLAN. At the rate our currency is
    losing value, 40K Dow will mean NOTHING. If you can collapse the dollar, collapsing the
    market will not matter. When foreign entities lose faith in our currency, game over.
    Get some commodities, because hard assets will be the only things worth anything.

 

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