Worrying Signs in a Surging Dollar | Technical Outlook, Edition #222 (14/07/2022)
This edition discusses how the US Federal Reserve might have ended up between a rock and a hard place—and why a sledgehammer may be a terrible problem solving tool. Read on for more 👇
Surging Strength, Rate Hikes. It’s all happening for the Greenback
Part 1 | Introduction
The inflation inferno continues spreading like wildfire, only fueled further by the latest US CPI figures, which reached an eye-watering hit of 9.1%, up 0.5% from the last month's 8.6%.
This fresh 40-year high in US inflation places the Federal Reserve chairman Jerome Powell in a precarious position, choose recession over persistently high inflation or risk it now becoming entrenched.
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Talk about being between a rock and a hard place!
In the latest FOMC minutes, he openly stated that the "Fed needs to see evidence of month-on-month falls in inflation it will be satisfied in winning the fight against rising prices".
Powell's stance sets the stage for more aggressive rate hikes and suggests that inflation is far more entrenched than the market anticipated.
The Fed has made abundantly clear that bringing down CPI is their primary objective, and they will continue to hike rates accordingly.
This focus on CPI means that the odds of avoiding recession are dwindling by the day as JPOW intends to slow the US economy even further.
If that wasn't enough to convince you we aren't heading into a bull market anytime soon, then perhaps the US Dollar Currency Index ($DXY) may urge those with their head in the clouds to reconsider.
The greenback is trading at its highest in 20 years, with central banks worldwide spooked.
Here's a possible explanation for why…
Did you watch the first lesson in our 2022 Crypto Trading Course?
Part 2 | Fall of the Greenback?
There was a lot of conjecture surrounding US Dollar weakness after sanctions severed Russia from SWIFT (Society for Worldwide Interbank Financial Telecommunications) and China pursuing the possibility of cross-border payments in BRICS currencies.
“SWIFT is a member-owned cooperative that provides secure messaging for international money transfers between participating banks. The banking system facilities transactions across 11,000 financial institutions in over 200 countries and territories.” – Investopedia
While the immediate effectiveness of the economic sanctions is questionable, the broader implications to the Russian economy of being barred from the SWIFT cross-border settlement system are still in development and open for interpretation.
However, the less-mentioned consequence might turn out to be the unintentional but now accelerated decline of the US Dollar as the de-facto world reserve currency. In addition to Saudi Arabia accepting the Yuan (CNY) for some oil sales to China, the recent announcement from the Reserve Bank of India (RBI) looks to pave the way for international trade settlement in the Rupee (INR).
This latest move from India is interesting, not least a commendable reflection of their commitment to their policy of non-alignment (i.e. not picking a side).
A member of the Quadrilateral Dialogue—the US-led security alliance also known as the “Quad”—the Indian government also enjoys friendly diplomatic relations with Russia, while also being a major buyer of Russian weapons exports. While the US and EU governments piled on sanctions that restricted critical production-input commodities, the Indian government declined to participate and continued their purchases of Russian energy.
Now, the bold move to allow the settlement of international trade in INR seems to all but confirm India’s outright refusal to jump on the bandwagon. As an emerging player in the world economy and core member in the BRICS association, the RBI looks to be making headway in promoting the internationalising of the INR in cross-border trade—perhaps, towards a future where the INR serves as a reserve currency. The petro-Rupee anyone?
The USD isn't showing signs of weakness; in fact, it's doing the opposite.
The $DXY tracks US Dollar strength against a basket of major currencies and currently trades above 108 points—the highest since 2002!
No matter the current rhetoric or market narrative, the world revolves around the greenback. Until the evidence suggests otherwise:
(1) - 90% of foreign currency transactions are in USD
(2) - 60% of global trade uses USD
(3) - 25% of global GDP comes from the United States
No wonder JPOW might be feeling the heat…
Fighting inflation by hiking rates or demand destruction doesn't just tank financial assets and kill debt-driven domestic consumer demand—it is a sledgehammer belting the global economy towards recession.
It sounds graphic, but this occurs when the Fed raises rates to fight inflation because it also causes a dollar shortage by driving up exchange rates.
The EUR, CHF, and USD are all trading at parity for the first time in decades.
This action by the Feds places tremendous strain on foreign governments, especially those transacting and trading in US dollars.
Soaring food or energy prices might be manageable for Europe but not for countries such as Brazil or Mexico.
As a result, foreign central banks will print their own domestic currencies into oblivion by printing into US Dollar strength so they may secure necessities.
Of course, this is no magic bullet, as printing one's own domestic currency is a delicious recipe for hyperinflation. Moreover, this hyperinflation will ravage currency trust and value, eventually causing these countries' Central Banks to "dollarize" either officially or de facto.
“Dollarization is when the US dollar is used in addition to or instead of the domestic currency of another country. It is an example of currency substitution. Dollarization usually happens when a country's own domestic currency loses its usefulness as a medium of exchange due to hyperinflation or instability.” - Investopedia
If anything, the US Dollar will collapse ironically under its might, not weakness, but only after all weaker currencies have submitted to it.
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Part 3 | Conclusion
It could be we've now reached a turning point, and countries are forced to choose either:
(1) - The current USD standard and stablecoins to plug the demand gap (most people in the world don't have bank accounts, but they do have wallets).
(2) - Chinese controlled CBDC system with access to the BRICS commodities market.
(3) - Bitcoin as an independent and politically agnostic currency.
To make matters worse, there are now rumours of a 100 basis point rate hike instead of 75 bps for the next FOMC on July 26th.
Euro vs. US Dollar, EUR/USD - Weekly, W1
US Dollar Currency Index, $DXY - Weekly, W1
Strap in and batter down the hatches; it might be time for a severe economic downturn if the Fed gets it wrong...
That’s us for today. See you again for the next update readers!
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