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Wednesday, March 11, 2015

Dollar index revisited

Back in Nov. in Dollar index bull market? I showed how I thought the dollar index monthly ADX was indicating the dollar was in a new bull market.  It has since gone on to conquer resistance level after resistance level.  Here is a look at the daily chart.

That is one powerful move.  Since blasting off last summer it has not even come close to touching the 50 SMA.  This is very similar to what SPX did in 1995.  SPX continued up for years.  The dollar could keep pushing higher for years as well.  I have seen a few articles proclaiming the rise in the dollar is fine and dandy and not a problem for U.S. markets.  They site past history going back to the early 80s.  I don't believe the comparisons are valid.  Since the late 90s the big multinational companies are getting way more revenue from overseas then in the old days.  The rising dollar greatly increases the cost of exports abroad and certainly makes them less competitive.  Since 2000 SPX has had mostly an inverse correlation to the dollar.  In our current situation there may be trouble for the entire world, not just U.S. stocks.

Here is a good article on one particular problem with a rising dollar.  Albert Edwards: Global liquidity is evaporating  Keep in mind that the dollar fell almost continuously from early 2002 until 2008.  It has been mostly sideways since then until last summer.  Here is a snippet explaining the problem. 

Edwards writes that in periods of weakness, central banks all over the world printed cash to buy up US dollars. That keeps their currencies weak and is a type of quantitative easing, he wrote, which boosts exports and keeps economies competitive.

But as the dollar rallies, "FX intervention rapidly dries up and can even reverse, exerting a massive monetary tightening on emerging economies and ultimately the entire over-inflated global financial complex."

Check out this chart.
Global foreign exchange reserves are contracting for the first time since 2008.  Global liquidity is drying up for sure.  Apparently a rising dollar is a de facto global tightening.  Its kind of an interesting situation.  Since 2008 the FED printed up about $3.5 trillion.  In that time the dollar index went sideways instead of falling.  They stopped the printing press and the dollar is flying up.  The chart was saying up so I was expecting up, but I had no idea it would fly up like this.  I have no idea why it is moving so fast.  If printing trillions didn't make it go down what exactly can the FED do about it if they wanted to?  Now that I can see that a rising dollar is a global tightening then the apparent slowing of the global economy makes sense.  Beyond hurting corporate revenue I never really thought about other consequences of a rising dollar.  There is much more to it now in our connected global economy.  There is more to this problem though.  The BIS put out an interesting article Dollar surge endangers global debt edifice, warns BIS  Here are some numbers from the article:
The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47pc. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars. 

I am not sure anybody knows the true size of the problem.  Many loans were made to individual companies.  I have seen figures ranging from $5 trillion all they way up to $9 trillion.  Every entity that borrowed that money now has to repay it in dollars that are worth a lot more then when the loan was taken out.  So far they are on the hook for about 20% more.  Even though we are not hearing about it here in this country there has to be out and out panic in a lot of companies around the world.  How will this play out?  That is a good question.  Anybody got an answer?  It seems there is a serious risk of this going horribly wrong in a way that makes the financial crisis look like a drop in the bucket.  China and the emerging markets helped to restart the global economy during that crisis.  It looks like they could be at the center of the crisis now if one emerges. 
The rising dollar clearly does matter and it has now come to the attention of investors.  This gives us more reason to watch the global economic data.  If a crisis is going to happen it should manifest itself in a collapsing global economy. 


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