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Everyone points to the Debt-GDP ratio of 135% and scratches their heads as to why the American currency is getting gobbled up with such blind enthusiasm. The reason has nothing to do with Europe’s energy mess or Japan’s demographics; it has to do with the voracious appetites by debtors (both corporate and sovereign) for high-quality collateral being demanded by lenders. With risks rising, the mountains of debt around the world are being asked – ordered – to provide collateral other than their domestic Serbian bonds or corporate paper and that “other” is U.S. Treasury bills of short duration and which carry massive liquidity.
Now, in the period of March 2009 until January 2022, central banks led by the U.S. Fed were more than happy to offer container-ship amounts of liquidity and everyone could throw a few Tesla bonds or Dum-Sing technology shares up as collateral which meant minor degrees of upside pressure on the greenback. However, and this is the point of the exercise, someone or something is creating a massive scramble of AAA-rated collateral. Usually, it is never a rosy economic forecast that invokes a mad dash for upgraded collateral. Conversely, it is usually – in fact, always – the case where someone knows something we don’t, as in a major default on the horizon by a European manufacturer closing its doors due to energy issues or a Chinese mortgage lender hitting the skids. So, if the U.S. dollar is to be viewed as a bellwether for U.S. growth, the ask yourself why the S&P500 is about to test the lows. I argue that the 2022 spike in the U.S. dollar is technical, as opposed to fundamental, in nature. As such, the parabolic rise should viewed as a “terminal” move. When it reverses, these foreign inflows will also reverse and that means that stocks will be sold while bond yields continue to rise.
As the events described above unfold, all commodities traded in dollars will reverse but my years of watching the gold market against other commodities tell me that gold will reverse long before the USD tops out. It will be the canary in the Forex coal mine heralding the end of U.S. dollar’s joyride.=just as I did in late 2015 and March 16th, 2020.
