Managing Editor of Real Vision, Roger Hirst looks at the latest conversations about monetary policies that continue to stack the rebound in favor of risk assets and large corporates, at the expense of the real economy. Are these policies continuing to damage the economy despite the recovery in equities? The Chatter looks at the sell-off in the US dollar and puts the bull vs bear debate in historical context. The Whisper looks at the potential rise of both bankruptcies and the zombie company.
“The speed of the economic shutdown and the size of the response has seen risk assets break records in both the collapse and the rebound in prices. Some of the extreme moves may have been further distorted by an uneven return to economic activity. But the signals from these assets may begin to reverse now that economies are attempting to re-open.
The U.S. dollar has been on the back foot for some time now. It could be that the size of the U.S. rescue package is finally having an impact although the bulk of the announcements were made by mid-April, during which time the U.S. dollar was generally strengthening versus the euro and the broad based emerging markets currency index.
The most recent bout of U.S. dollar weakness, did get going around the same time as Fed Chairman Powell’s now infamous comments on the 60 Minutes TV program, ‘that there was really no limit to what they can do with these lending programs.’ However, it is more likely that the recent weakness in the dollar is more about confidence in the rebound of the global economy. With the currency moving through the risk-on part of the dollar smile.
So what’s the dollar smile? It’s a phrase that was coined by macro strategist Stephen Li Jen to describe different states of the dollar. And I’ll use the dollar in 2016 by way of a description. The dollar is strong during periods of uncertainty and risk off. And this was the case at the end of 2015 and beginning of 2016, when the oil and commodity bust had created a profits recession that was centered upon commodity extraction and its related service sectors. The dollar is weak when there are periods of globally coordinated growth. Other higher beta currencies, such as emerging market and commodity currencies, lead the charge. And this was the period in the middle of 2016 which took place after a series of efforts to support growth, and these included the U.S. Federal Reserve dialing back its rate hiking intentions, China adding record levels of new credit in absolute terms to its domestic economy, and an alleged agreement was reached to weaken the dollar at the G20 meeting in Shanghai, unofficially known as the Shanghai Accord.
The other side of the dollar smile is a return to dollar strength. In this instance, it’s when U.S. growth is expected to outpace global growth. The dollar was strong after the election of Donald Trump, and a clean sweep for the Republicans, which saw focus placed on the domestic U.S. economy. These three states roughly equate to the dollar smile, we’re most likely in the middle section right now, i.e. strength in higher beta currencies rather than weakness in the dollar per say – though obviously they are two sides of the same coin.
Dollar weakness then reinforces the feedback loop because a weaker dollar helps to loosen global financial conditions, which is a positive for risk assets. But Europe has also helped to play its part. Now, there’s always going to be uncertainty in Europe. It’s the nature of having so many countries with a currency union and an even larger selection within the broader European Union. But when the crisis first struck, the US responded decisively and in size, whilst the response from Europe took time to build momentum.”