DXY - Dollar Squeeze into Q4
Updated
Idea for DXY:
- Why there may be a dollar squeeze into Q4 2021:
- June 30, G-SIB banks begin stock buybacks.
- Capital returned to investors nearing 200bn as estimated by Barclays.
- $200 billion less of banks’ demand for reserves, Treasuries, MBS, and deposits.
- "With a 5% SLR minimum at the holdco level, banks run 20-times leverage, which means that $10 billion in stock buybacks means $200 billion less of banks’ demand for reserves, Treasuries, MBS, and deposits" - Zoltan; That's 20x leverage =
4T of leveraged capital.
-1T o/n RRP usage continually drains systemic liquidity.
- Zoltan:
" So the sterilization of reserves begins, and so the o/n RRP facility turns from a largely passive tool that provided an interest rate floor to the deposits that large banks have been pushing away, into an active tool that “sucks” the deposits away that banks decided to retain."
"And here is why the problem is similar to the repo crisis of 2019: soon we will find that while cash-rich banks can handle the outflows, some bond-heavy banks cannot. As a result, Zoltan predicts that next “we will notice that some banks (those who can not handle outflows) are borrowing advances from FHLBs, and cash-rich banks stop lending in the FX swap market as the RRP facility pulled reserves away from them and the Fed has to re-start the FX swap lines to offset.”
Bottom line: whereas previously we saw Libor-OIS collapse, this key funding spread will have to widen from here, unless the Fed lowers the o/n RRP rate again back to where it was before."
"the Fed turned “unlimited” quantities into “money for free” and started to sterilize reserves."
"we are witnessing the dealer of last resort (DoLR) learning the art of dealing, making unforced errors"
- China consumer spending as a % of GDP was only 54% last year (2011-2019 avg. of 53%) vs consumption in advanced economies averaging 70-80%.
- YoY % deceleration means stagflation/deflationary positioning.
- China has been the global economy driver since 2008, and were first to tighten monetary policy, so this a more accurate assessment of global economic health.
- Spending problem in China fuels the demand for USD and US bonds, as they are seen as more secure than other DM/EM debt.
- Previously forecasted the DXY Bounce in May:
- Price is in sync with the Technicals:
Predict 6000~ pips DXY squeeze into Q4.
GLHF
- DPT
- Why there may be a dollar squeeze into Q4 2021:
- June 30, G-SIB banks begin stock buybacks.
- Capital returned to investors nearing 200bn as estimated by Barclays.
- $200 billion less of banks’ demand for reserves, Treasuries, MBS, and deposits.
- "With a 5% SLR minimum at the holdco level, banks run 20-times leverage, which means that $10 billion in stock buybacks means $200 billion less of banks’ demand for reserves, Treasuries, MBS, and deposits" - Zoltan; That's 20x leverage =
4T of leveraged capital.-
1T o/n RRP usage continually drains systemic liquidity.- Zoltan:
" So the sterilization of reserves begins, and so the o/n RRP facility turns from a largely passive tool that provided an interest rate floor to the deposits that large banks have been pushing away, into an active tool that “sucks” the deposits away that banks decided to retain."
"And here is why the problem is similar to the repo crisis of 2019: soon we will find that while cash-rich banks can handle the outflows, some bond-heavy banks cannot. As a result, Zoltan predicts that next “we will notice that some banks (those who can not handle outflows) are borrowing advances from FHLBs, and cash-rich banks stop lending in the FX swap market as the RRP facility pulled reserves away from them and the Fed has to re-start the FX swap lines to offset.”
Bottom line: whereas previously we saw Libor-OIS collapse, this key funding spread will have to widen from here, unless the Fed lowers the o/n RRP rate again back to where it was before."
"the Fed turned “unlimited” quantities into “money for free” and started to sterilize reserves."
"we are witnessing the dealer of last resort (DoLR) learning the art of dealing, making unforced errors"
- China consumer spending as a % of GDP was only 54% last year (2011-2019 avg. of 53%) vs consumption in advanced economies averaging 70-80%.
- YoY % deceleration means stagflation/deflationary positioning.
- China has been the global economy driver since 2008, and were first to tighten monetary policy, so this a more accurate assessment of global economic health.
- Spending problem in China fuels the demand for USD and US bonds, as they are seen as more secure than other DM/EM debt.
- Previously forecasted the DXY Bounce in May:
- Price is in sync with the Technicals:
Predict 6000~ pips DXY squeeze into Q4.
GLHF
- DPT
Trade active
Looks ready for a squeeze: Trade active
Price confirming my suspicions.How can there be a dollar shortage/squeeze when 40% of all US money was printed in 2020-2021?
It is 50x leveraged for debt and derivatives based on it. There's just that much debt.
Trade active
Perfect bounce on ML channel bottomTrade active
Some thoughts:Bitfinex Securities announced today, basically you can just buy stocks directly with crypto now. Tether is printed for free by exchanges.
Bitcoin and Tether - The bottom line is that tether is not so different from subprime mortgage MBS's or CDOs of 08. They are just a new financial instrument marketed to retail to dump infinite margin risk on them. Implosion is inevitable in a credit/collateral crunch.
While I don't fully understand the plumbing of systemic liquidity, and I am not entirely sure if this scenario applies now, but I cant help but think it rhymes:
The proximate cause of the 2008 liquidity crisis was the differentiation of C2 collateral from C1 collateral. The major central banks and treasuries responded to the crisis by both increasing the monetary base and swapping superior for inferior collateral. This led to an exponential rise and subsequent crash in the ratio of total US financial sector liabilities to what we refer to as “ultimate liquidity”.
The nonfinancial sector has gone from holding bank liabilities to holding a diversified portfolio of securitized assets directly. While not backed by D, they were backed by C. As long as there is confidence in the assets comprising C, or as long as C1 remains a significant share of C, it may be assumed that these claims are "liquid", i.e., they can be converted into central bank money at fairly short notice.
This would appear to be happening now with the CB balance sheets effectively interfering with stock markets, and direct bond purchases.
So what happens in that economy when suddenly there are doubts about the underlying value of Exxon shares and other securitized revenue streams? Naturally they lose their attractiveness as investments and as liquid assets that are used as money. Suddenly there is deemed to be a liquidity shortage and this intensifies when it is clear just to what extent the value of pseudo liquid assets in the economy has expanded in relation to central bank money. Other collateral or money may continue to be acceptable, such as U.S. Treasuries, Bunds etc.
So there is a sudden split between cash and certain types of collateral, and everything else.
Everything else ceases to be liquid.
imf.org/external/pubs/ft/wp/2012/wp1295.pdf
Evergrande is rumored to be a non-trivial backer of tether. They are in the process of imploding. We will see how that plays out. I can't see how tether ends happily.
The global credit crunch is confirmed to have already begun, with global credit impulse collapsing. Foreigners and institutions should seek USD + UST as higher quality collateral.
China also does not have a floating currency rate, but it is pegged to the USD, and managed through their purchase of the USD. This is really the deflationary force which will take supply of collateral and drive the dollar higher.
With China beginning monetary easing, it should correlate to a lower CNYUSD, with yuan being sold and dollar being bought, further sending the dollar up and removing supply.
Thinking back on GPIF slashing US Treasurys, the rising yields of foreign institutions had fooled US investors into believing their economy was booming and reflation was accelerating.
With foreigners selling US debt, I don't foresee the Fed being able to stop Treasury purchases any time soon.
The asset bubble will inevitably burst with the dollar rising, and it will be such that bond purchases can continue. US economy can't handle rising yields. There will be a sudden rush for dollars and high quality collateral, for which there is no supply because of the leverage of liabilities on the dollar.
Trade active
More property companies capitulating:Dollar bonds are the canary.
Property companies' debt defaults are cascading into tightening credit conditions in the Chinese economy because the PBOC's assets being 2/3~ FX reserves.
China has been easing to increase credit/M2 growth recently. It's to try and counteract monetary tightness resulting from USD shortage (assets) pressuring PBOC liabilities (base money supply for domestic economy).
Source: Maroon Macro
This will lead to demand for the dollar.
Note
We are in a demand zone, and have retested the reversal breakout. I don't think we are going back to 80 (unless US defaults - watch the debt ceiling approaching), but in that case equities would fall anyway:Trade closed: target reached
Now time for risk parity
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