Cross-Asset Liquidity Strategist, CrossBorder Capital

Michael J. Howell

Cross-Asset Liquidity Strategist

Implementing Research Using Alt Data & AI

CrossBorder Capital

CrossBorder Capital is a London-based independent investment advisory firm. Founded in 1996, it exploits a gap in the investment arena by focusing on Central bank liquidity. 

It specialises in the monitoring and analysis of global liquidity flows - an important determinant of asset prices, from currencies through to bonds, equities and real estate.

CrossBorder Capital implements its investment strategy and currently manages over US$ 350m.


Cross Asset Strategy

<ul>
<li>US dollar is resuming its long-term downtrend</li>
<li>Net supply of international safe assets increasing. US Treasury adding more supply when needs of  ‘liquid’ private sector dropping</li>
<li>Already foreigners selling US bonds and switching into cyclical US risk assets</li>
<li>Liquidity factors are negative on the US dollar and warn of a 10-15% drop</li>
<li>Adding capital outflows, US dollar fall could exceed 20%</li>
</ul>


US dollar is resuming its long-term downtrend
Net supply of international safe assets increasing. US Treasury adding more supply when needs of  ‘liquid’ private sector dropping
Already foreigners selling US bonds and switching into cyclical US risk assets
Liquidity factors are negative on the US dollar and warn of a 10-15% drop
Adding capital outflows, US dollar fall could exceed 20%


<ul>
<li>Asia forex market volatility falls to near 40-year lows</li>
<li>Notional Asian ‘Euro’ trading within narrow band since 2016</li>
<li>Yuan positioning like Deutschmark within the Euro ‘Euro’</li>
<li>China well-served by such arrangements</li>
<li>Implies as USD devalues Asia gains liquidity and Europe loses export competitiveness</li>
</ul>


Asia forex market volatility falls to near 40-year lows
Notional Asian ‘Euro’ trading within narrow band since 2016
Yuan positioning like Deutschmark within the Euro ‘Euro’
China well-served by such arrangements
Implies as USD devalues Asia gains liquidity and Europe loses export competitiveness
 

The Asian ‘Euro’ (¥¥): Does It Already Exist?

Founder

Olivier Desbarres

Exacting. Excellent. Exceeding. Exemplary.

4X Global Research

4X Global Research was founded in 2017 to provide institutional and corporate clients with the substantive research, high-quality analysis and thoughtful insight on Emerging and G20 economies and financial markets they need to make informed and timely decisions and gain an edge in their investments.

FX & Rates

US financial markets have had to contend with three “hawkish surprises” so far this month and on each occasion price action has been broadly the same. Initially the Dollar rallied, the S&amp;P 500 sold off and US Treasury yields rose but these (modest) moves were very quickly reversed. Volatility and directionality have thus remained limited, although the Dollar NEER has slowly weakened to within touching distance of a 3-year low – in line with our bearish Dollar outlook (see <a href="https://www.smartkarma.com/insights/dollar-and-the-three-bears" target="_blank" rel="noopener">Dollar and the three bears</a>, 19th April 2021).Price action suggests that markets are still seemingly not convinced, rightly in our view, that US inflation will remain materially above target medium-term and that the Federal Reserve will have to tighten monetary policy any time soon. The question is whether US financial markets will follow the same pattern following today’s release (at 13.30 London time) of US PCE-inflation data for April. The consensus forecast is that core PCE-inflation – the Federal Reserve’s preferred measure of inflation – rose from 1.8% yoy in March to 2.9% yoy, a 29-year high and well above the Federal Reserve’s medium-term target of 2%.Our view is that the scope for core PCE-inflation to surprise materially to the upside in April is limited, with the risk to the Dollar based on recent precedent biased to the downside in coming sessions. Medium-term we think the case for US CPI-inflation to remain well above the Fed’s target is far from water tight. Moreover, the Fed has form when it comes to keeping monetary policy very loose despite decent US GDP growth and an improving domestic labour market.Our core scenario at present is that the Federal Reserve will only start tapering its monthly asset purchases in 2022 and only start hiking its policy rate in 2023. We therefore remain bearish the US Dollar – a theme we will develop in future FIRMS reports.

US financial markets have had to contend with three “hawkish surprises” so far this month and on each occasion price action has been broadly the same. Initially the Dollar rallied, the S&amp;P 500 sold off and US Treasury yields rose but these (modest) moves were very quickly reversed. Volatility and directionality have thus remained limited, although the Dollar NEER has slowly weakened to within touching distance of a 3-year low – in line with our bearish Dollar outlook (see Dollar and the three bears, 19th April 2021).Price action suggests that markets are still seemingly not convinced, rightly in our view, that US inflation will remain materially above target medium-term and that the Federal Reserve will have to tighten monetary policy any time soon. The question is whether US financial markets will follow the same pattern following today’s release (at 13.30 London time) of US PCE-inflation data for April. The consensus forecast is that core PCE-inflation – the Federal Reserve’s preferred measure of inflation – rose from 1.8% yoy in March to 2.9% yoy, a 29-year high and well above the Federal Reserve’s medium-term target of 2%.Our view is that the scope for core PCE-inflation to surprise materially to the upside in April is limited, with the risk to the Dollar based on recent precedent biased to the downside in coming sessions. Medium-term we think the case for US CPI-inflation to remain well above the Fed’s target is far from water tight. Moreover, the Fed has form when it comes to keeping monetary policy very loose despite decent US GDP growth and an improving domestic labour market.Our core scenario at present is that the Federal Reserve will only start tapering its monthly asset purchases in 2022 and only start hiking its policy rate in 2023. We therefore remain bearish the US Dollar – a theme we will develop in future FIRMS reports.

Tantrum “lite” Won’t Help US Dollar

<ul>
<li>Latest data show large withdrawals of US Liquidity thru May by the US Fed</li>
<li>This may be technical, but it echoes concerns expressed at the last FOMC</li>
<li>A taper may be coming. This could trigger another tantrum</li>
<li>Longer-term Fed must operate a ‘put’ and expand its balance sheet at close to 10% per annum to support debt roll-overs and fiscal spending plans</li>
</ul>


Latest data show large withdrawals of US Liquidity thru May by the US Fed
This may be technical, but it echoes concerns expressed at the last FOMC
A taper may be coming. This could trigger another tantrum
Longer-term Fed must operate a ‘put’ and expand its balance sheet at close to 10% per annum to support debt roll-overs and fiscal spending plans


Global QE: Is The US Fed About to Tighten?

The past week has seen a short-lived flurry of market price action, with daily volatility in the US Dollar and equities edging higher on 30th April and again on 4th May. However, volatility overall has remained subdued, particularly in the benchmark US 10-year Treasury yield. Moreover, the Dollar NEER and US 10-year yields – increasingly a bellwether for financial markets – remain firmly within their multi-week ranges while the S&amp;P 500 yesterday closed in the middle of a narrow 3-week range of just 1.8%. US markets are seemingly sitting on the fence at this juncture, unwilling to take material directional positions given the uncertain outlook for US and global inflation and central banks’ reaction functions.  However, the gradual 6bp fall in the US benchmark 10-year Treasury yield between 29th April and 5th May to about 1.58% and the flattening of the 2s5s and 2s10s yield curves alongside a 0.4% gain in the Dollar NEER is noteworthy.Our take is that markets may have become marginally less worried that the Fed will have no choice but to tighten monetary policy sooner than it has indicated despite expectations that year-on-year US CPI-inflation will rise further in coming months. Moreover, the inverse relationship between the “safe-haven” Dollar and riskier assets has remained strong. US macro data released in the past week have been strong enough to put a floor under the S&amp;P 500 but not strong enough to push it to new highs. Finally we think that markets, in particular real-money funds, have once again been paying greater attention to valuations, including the relative cheapness of the Dollar.Notably most of the other major NEERs have also traded in narrow ranges since early March and few have moved much in the past month. Central banks, particularly in Asia, have been willing and able to keep their currencies on a short leash in order to maintain export competitiveness and minimise inflationary or deflationary pressures.Within Asia, the Taiwan Dollar is looking expensive relative to the Korean Won, in our view.

The past week has seen a short-lived flurry of market price action, with daily volatility in the US Dollar and equities edging higher on 30th April and again on 4th May. However, volatility overall has remained subdued, particularly in the benchmark US 10-year Treasury yield. Moreover, the Dollar NEER and US 10-year yields – increasingly a bellwether for financial markets – remain firmly within their multi-week ranges while the S&amp;P 500 yesterday closed in the middle of a narrow 3-week range of just 1.8%. US markets are seemingly sitting on the fence at this juncture, unwilling to take material directional positions given the uncertain outlook for US and global inflation and central banks’ reaction functions.  However, the gradual 6bp fall in the US benchmark 10-year Treasury yield between 29th April and 5th May to about 1.58% and the flattening of the 2s5s and 2s10s yield curves alongside a 0.4% gain in the Dollar NEER is noteworthy.Our take is that markets may have become marginally less worried that the Fed will have no choice but to tighten monetary policy sooner than it has indicated despite expectations that year-on-year US CPI-inflation will rise further in coming months. Moreover, the inverse relationship between the “safe-haven” Dollar and riskier assets has remained strong. US macro data released in the past week have been strong enough to put a floor under the S&amp;P 500 but not strong enough to push it to new highs. Finally we think that markets, in particular real-money funds, have once again been paying greater attention to valuations, including the relative cheapness of the Dollar.Notably most of the other major NEERs have also traded in narrow ranges since early March and few have moved much in the past month. Central banks, particularly in Asia, have been willing and able to keep their currencies on a short leash in order to maintain export competitiveness and minimise inflationary or deflationary pressures.Within Asia, the Taiwan Dollar is looking expensive relative to the Korean Won, in our view.

Sitting on Range-Trade Fence: Complacent Comfort

United States

The euro is the official currency of the European Economic & Monetary Union.  The US dollar is the official currency of the United States of America.

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