It’s All About The Benjamins

The only story that matters across global financial markets right now is the parabolic ascent of the US dollar:



The implications of what ‘excessive’ US dollar strength could lead to across global financial markets has created a recent environment in which USD strength results in US equity market weakness and vice versa:



A few charts courtesy of the Bank for International Settlements highlight the potential blow-up about to befall emerging markets, China, and India due to the recent dollar rally:


US dollar credit to non-financial borrowers (Brazil, China, India)




US dollar credit to non-banks outside the US (by counterparty country)



EMs face an escalating USD-denominated debt crisis over the coming years…




Non-bank investors outside the US have loaded up on dollar bonds since the Global Financial Crisis while banks have largely de-risked:



While the dollar has soared during the past couple of weeks gold has been clobbered:


 8 consecutive days down with 4 consecutive closes below the lower 2-standard deviation Bollinger Band on the daily – gold is now as oversold as it was at the November low

With the CRB Index nearly back to its 2008 crash lows and the US dollar enjoying a parabolic rise there is a strong odor of deflation permeating throughout global financial markets. Meanwhile, the S&P 500 is still less than 5% from all-time highs. It seems that one of two things are about to happen: 1. The deflation/strong USD scare is overblown and commodities rally as the USD pulls back 2. Equities move into a full blown bear market as deflationary fears spread and USD strength persists.

How the emerging market/China/India US dollar funding crisis will ultimately dictate which path financial markets take. If the Fed announces more US dollar swap lines and global central banks work to avert a dollar crisis then path #1 seems likely. However, if global central banks are late to act and/or begin tightening interest rates then equities may move into what many would say is a long overdue cyclical bear market.

Eric Coffin of HRA Advisories has an interesting take on the current situation with the US dollar rally and where the EUR/USD exchange rate may be headed:

“If the EU does pull out of this economic tailspin as I expect there will be room for the US/Euro exchange to rise. It’s still my expectation that we will see a stronger Euro by year end but traders need to get past the shock and awe phase of the ECB QE program and the first Fed rate increase.”

I agree with a lot of what Eric writes and I believe that we will see a 1,000 pip rally in EUR/USD within a one week time span at some point during 2015. Needless to say the key for traders will be in figuring out when that will take place and what the new equilibrium level for EUR/USD will be.

For the foreseeable future if you want to quickly grasp the pulse of financial markets look no further than the level of the US Dollar Index or the EUR/USD currency cross. It’s all about the Benjamins…