Skip to main content
February 21, 2019

Currency puzzles and a weaponised dollar

US dollar notes. /FILE
US dollar notes. /FILE
The Global FX markets trade approximately $5.1 trillion of volume every day. Foreign exchange markets are the deepest and most liquid of all markets and because of the Leverage [''bang for your buck''] that participants can access, it remains a place which can serve up the most exponential returns and of course because its symmetrical exponential losses as well. George Soros and Stanley Druckenmiller remain legends in the FX World for taking more than a $1b off the Bank of England in 1992, something I recall as if it were yesterday because in those days I sat next to the FX desk at Credit Suisse First Boston and watched it unfold in real time. In 1992, the FX markets were ''voice'' traded and most FX traders came from the East End and many of them were plain raucous. 
Today, algorithmic and computerised trading rules the roost and markets can move dramatically on ''semantics and linguistics'' 
Having watched the FX markets more closely than I have watched any Woman except my wife, of course, let me deal with one Canard that Canard being the imminent demise of the US dollar. Ever since I was a little boy in shorts in Mombasa reading the back pages of the Economist, folks have been talking about the hegemony of the Dollar and how this hegemony was set to be broken into tiny little pieces. Iraq's Saddam Hussein was keen to throw the Dollar over and ended up dead. Libya's Muammar Gaddafi spoke of a Dinar and ended up dead as well. The crypto evangelists have been knocking with an evangelical fervour that reminds me folks who had been out all night at somewhere like the ministry of sound, tired and strung out a little like Elon is behaving of late. If you are betting on the collapse of the Dollar, please note it might take an eternity to pan out and this year it will have proven extremely expensive.
A trade-weighted index of the US Dollar has climbed more than 5% this year and is nearing its all-time high via @purviso. 
President Trump has apparently embraced a strong Dollar and of course coercive financial warfare and tweeted this on 16 August. Our economy is doing better than ever. Money is pouring into our cherished Dollar like rarely before, companies earnings are higher than ever, inflation is low & business optimism is higher than it has ever been. For the first time in many decades, we are protecting our workers! 
Year to date, the USD has rallied about 37% against the Argentina Peso and the Turkish Lira, its +16.21% versus the South African Rand, +14.55% against the Russian Ruble. I can find only three currencies that have appreciated against the Dollar in 2018. The Mexico Peso is +3.2%, The Kenya Shilling +2.5% and the Japanese Yen is +2.00%.  The Kenya Shilling is the second best performing currency in the world in 2018 hence my headline ''Currency Puzzles'' 
Essentially the US has been raising rates [making holding the Dollar more attractive] and reducing the supply of Dollars. Previously emerging and frontier markets had been showering in a golden flood of cheap Dollar liquidity, had been borrowing Dollars like there was no tomorrow but are now scrambling to find those Dollars because the ''Golden shower'' has been switched off. 
EM asset prices are being particularly badly hit. FX & FI, Citi. MSCI EM now down 20% from 25-Jan peak, EM Currency Index is 16% down from its peak vs the USD in mid-Feb, EMBI spread has increased by 101bp since Feb.
The India Rupee is at a record Low, the Rand at levels which are worse than when President Jacob Zuma was terminating his Finance Ministers and even fell 10% intra day. President Erdogan instead of seeking to bend the arc of history towards justice has been seeking to bend the arc of monetary policy to his will [won't happen stay limit short Reccip Tayyep]. According to calculations by Standard & Poor's, Turkey's GDP could shrink to $594bn next year, lowest level since 2006 and an unprecedented drop in wealth. As recently as 2013, Turkey was on the verge of a one-trillion-dollar economy.  Turkey's total stock market value is now $115bn, less than the stock market cap of McDonalds. I believe we have embarked on a very big rally in the Dollar and that there is a lot further to go. Now if you want to chance your arm in this Market, You can. 
Poll of the day