Last week's GDP growth figures proved that US economic performance is still pretty mediocre, bordering on mildly tepid. While the Hawks were eyeing a 2.6% growth figure, actual GDP fell short of expectations and posted a rather dismal growth rate of 2.3% annualized.
Yesterday, we got the Fed's favorite inflation indicator, Core PCE, the inflation barometer that's extracted from the GDP release. And what we got was a dismal 1.3% inflation rate (YoY). This validated, once again, that the US economy failed to reach escape velocity that would necessitate several rate hikes a year. Rather, it suggested that anything beyond one or two rate hikes was unnecessary. Hardly a hawkish sign, yet Dollar demand keeps on rising while US yields move lower. It is this very combination that suggests that Dollar demand is being stirred by the demand of US Treasuries. Some say that this is investors moving into safety amid the rout in Chinese markets. Well, that's probably true, at least, in part. But the rest? There's a big bet on what China will do next.
China to Buy Dollars?
With foreign reserves that approximate the size of Germany's economy, China is one of the world's largest investors, if not the largest. With the exception of the US Treasury market, most markets aren't large enough to accommodate such a large mass of reserves. In fact, China is the largest foreign holder of US Treasuries with most of its foreign reserves invested there. Recently, I pointed out that Beijing might be forced to devalue the Yuan in order to ease pressures on the economy. That is what's needed to stabilize its exports and ensure the economy doesn't spin out of control. That analysis was on the Yuan side of the equation, but what's the other side?
Simply this: When China moves to devalue the Yuan it will do so by selling Yuan and buying, naturally, US Dollars. For two key reasons, this is really Beijing's only option. First, it is because the US holds a massive trade deficit with China. Second, the US bond market is the only market sufficiently large enough to allow China to effectively devalue the Yuan. If the situation in China continues to deteriorate the likelihood that the PBOC will devalue the Yuan will rise. Despite lackluster US data, the US Dollar could get a boost from China when the PBOC makes its move.
How to Validate the China Dollar Bet?
When will Beijing make a move on the Yuan and buy dollars? No one knows, despite the increasing probability that the Yuan devaluation is getting closer. But what is known is that if china's data continues to deteriorate, it will further reinforce that big bet out there that some time, maybe soon, China will start buying more Dollars. So while the Fed's next move and the performance of the US economy is the key for the Dollar, speculation on the Chinese Yuan may eventually be the first catalyst for the Dollar's break higher.
Look for my post next week.
Best,
Lior Alkalay
INO.com Contributor - Forex
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
dollar is good to me buy god bless you and me no money no friend see me
the dollars fate is ultimately determined by Washington. over the long term,... if the fed prints more then they will be worth less.
Thanks for providing such good read.
As you explained about some possible move of China, but there are so many "Ifs and Then" in between. Moreover, situation of both US and China seems to be more complex and complicated, and probably far more different then as currently they are appearing.
By way of adopting devaluation decision for Yuan, China may found its Economy related problems, just changed or in other format, because till the date, there is very big uncertainty and vulnerability in China's Stock market, and it will play a vital role in next all policy making efforts.
Prevailing Current Account position and Financial as well market Cross connections of both US and China is so crucial and critical in nature that no specific action and its reaction can be presumed or expect.
I think, China is passing through its most critical Economical face, and now it become a question of survival, so to manage overall financial situation of country, or to protect its Economy, China may take some strange and surprising steps, which also include a probability like, instead of fresh investments in US China may consider to divest funds from US. So at this stage, to find more précised view, one must aware and ready to accept such kind of contrarian assumptions, consideration about possible effects thereof, is also essential.
With the dollar breaking even higher in the near future, why is everyone flocking to dividend payers so voraciously? Personally, I am willing to pay for growth in this current environment. With China propping up their equity markets over there, not allowing retail investors to either get out, or to make true retail investor type decisions in this current environment over their, I am not champing at the bit to dump my cash into dividend champions right now.
Approximately 3 - 6 months ago I changed my investment thesis and moved my monies all to US-centric companies. However, I did not concentrate my funds on high-quality dividend payers. Currently selling puts on AMZN to dollar-cost-average my price down, but have a nice position there. Sold out of AAPL a week ago. Bought into SWKS and SIMO two weeks ago. Dollar-cost-averaging down on both of those positions. Also have AGN and GILD in the Biotech space and approximately ten other solid positions across the spectrum to spread my risk.
I think the US is on solid ground for the last five months of 2015. I also think the US is THE equity market to be in during the last five months of 2015. I have not been a member of this service before. As such, I have not interacted with others before. I certainly hope to not have the same level of vitriol as I have experienced on other stock boards in the past.
Lastly, I do expect the Fed to begin raising by Dec. I think Sep. would be a mistake, although that may not stop them. Regardless, even if they did raise in Sep, 25 - 50 BP is far past due. FAR past due. I would submit that our economy needs some juice to get it going. We could use a 50 BP boost just to get us off of point zero and get the engine running again.
This administration has had the uncanny ability to snuff out any beginning embers of a recovery before it can become a fire. I do not know if it has been intentional or if it has just been out of pure inability. Regardless, it is well past time to kick these bums out!! Unceremoniously, kick them out on their butts!
This is a supply-side recovery, national debt growing faster than GDP, so that fact plus jobs exported or lost to automation makes for a weak rebound, no matter who the administration is. Current recovery looks like the earlier one after 9/11 or the ones in the '80s, driven by deficit spending.
" This validated, once again, that the US economy failed to reach escape velocity that would necessitate several rate hikes a year. Rather, it suggested that anything beyond one or two rate hikes was unnecessary. " You'd think from this that the Fed was hoping for a chance to raise interest rates, whereas the fact is the banks which own the Fed would like nothing so much as to dine on virtually interest-free money forever while simultanoeously dening savers any return whatsoever.
Yet Greenspan doubled rates in 2000 and Bernanke spiked rates from 1% to 5.25% in '06. The old neutral rate was 4%. Some think Yellen is just trying to pad rates a little so she can cut if need be. Others see rates as manipulating dollar strength to keep oil prices in the desired range to help US economy while harming Russia, Iran, and others.
Can anyone make any sense out of these extracts because they appear to be entirely contradictory.
WSJ Article:- By Shen Hong
Updated March 20, 2015 6:55 p.m. ET
SHANGHAI—China’s yuan recorded its best week in over seven years, as Beijing stepped into the markets to drive the currency higher and outflank investors betting on losses as the economy cools.
The yuan gained 0.9% against the U.S. dollar since a week earlier, a sharp move for a currency that lost 2.5% against the greenback all of last year. It was only the third time in 20 years that the yuan made a weekly move of that magnitude.
The sudden gains serve as a reminder that Beijing still keeps a firm grip on the currency and won’t allow heavy losses or one-way speculation. Capital has also been flowing out of China this year as the yuan has weakened—such currency depreciation turns off investors seeking higher-yielding assets. Worries linger that further yuan losses could exacerbate the trend and destabilize the already fragile financial system.
The INO blog: Lior Alkalay's comments:
"Simply this: When China moves to devalue the Yuan it will do so by selling Yuan and buying, naturally, US Dollars. For two key reasons, this is really Beijing's only option. First, it is because the US holds a massive trade deficit with China. Second, the US bond market is the only market sufficiently large enough to allow China to effectively devalue the Yuan. If the situation in China continues to deteriorate the likelihood that the PBOC will devalue the Yuan will rise. Despite lackluster US data, the US Dollar could get a boost from China when the PBOC makes its move."
Go figure!
Thank you for your comment.
I understand how this may be confusing, but I think today's event clearly signal that China indeed is weakening the Yuan.
http://goo.gl/4qxrnh
China should have bought a year ago May when QE ended. Buying the dollar now near a top is foolish, better for them would be to buy gold, silver, and oil. Of course, China has more pressing problems than investment in forex.
makes sense, unless china simply uses its reserves for stimulus measures to try to keep people employed. more roads to nowhere?
1.3% inflation and 2.2% growth indicate a need to refrain from ANY rate hikes in the foreseeable future. There is simply no rationale for interest rate hikes any time soon.