Why's the dollar up?

Quick post today...

But a very important one considering the absolute ridiculousness of this dollar move recently.

Recall this explainer that we concocted a few months ago...

The reason I wanna raise this again is because clearly we have shifted into a different dollar regime.

Do you recall people calling for DXY to push down to like, 82?

I do, and it never made any sense, but I guess that's why you pay us to put out what is generally more likely, right?

Not bad timing - but I'm not necessarily in the business of specific timing & execution since it's one of my weaknesses...

I just look for convexity.

But anyway, let's get into some of the factors that are driving the current dollar bull run...

What is clear and obvious?

What many have pointed to is the increased likelihood of Fed tightening...

However, the obvious isn't necessarily the key reason as to why the dollar is currently so bullish...

And we have to ask ourselves...

Are markets really pricing in further Fed tightening?

Here's Fed Funds Futures vs DXY...

And the answer is...

Well, yeah there's a component of that, but really, it's not the driving factor in my opinion.

What we could say is that the market is pricing it in now, but still, I reckon there are bigger reasons as to why the dollar is rallying...

But headlines that marry up nicely (Powell being reinstated for another term + belief that the Fed will tighten considerably for example) are lovely headlines for mainstream financial media.

Because what is more interesting?

Talking about those two things or chatting about a shortage of high quality assets leading to the dollar having a bit of bullishness?

What's the highest quality asset that a bank can have to ensure they meet their liquidity coverage ratio?

Treasuries!

That's one reason why I'm bullish bonds.

But there's also the case that to buy treasuries, you first need to buy dollars (in a roundabout way).

So this creates a bid into USD, and also creates a situation where USD can be deemed as 'safe' too for other types of investors.

And we can see this reflected in the swaps market...

Spreads on three-month euro-dollar cross-currency basis swaps were at the widest since since December 2020 at around minus 36 basis points, implying that non-U.S. borrowers are prepared to pay that much premium to access dollar funding.

What the fuck does that mean?

Well, looks like there is a funding rush into year end, predicated by those GSIB scores that I've been mentioning for a few months now...

And it seems to be a bit of a repeat of last Q4 too...

It's probably best to take a look at this piece to get where we're coming from here...

That was written in December last year, explaining the mechanism by which investors would need to make use of dollar funding lines to finance certain trades.

Markets don't repeat but rhyme or something...

This leads onto a broader point too though...

The US is doing well in terms of risk assets versus the rest of the world...

There's the Hang Seng vs DXY.

Now if you look back at the Dollar Smile diagram, you'll note that there is a sentence which refers to US outperformance.

This is another component as to why the dollar is pushing higher right now, and has been since June!

Death to dollar doomers!

And right now, I feel like the ES looks shockingly shit.

And the thing is, I don't write about the ES much, especially in the shorter term.

But the price action this last week looks awful.

In that case, does it mean there's a bit of risk-offishness coming into play?

I will lean on yes.

We've had a breakdown from the high, but that doesn't imply risk off - it's literally a breather after the marathon sprint the market's had.

Risk off would be a broader decline til we see CNBC's Markets in Turmoil segment run...

In which case, you buy again a day or two later.

The market is complacent, even if people don't reckon it is.

I mean, look at this.

Do we see any more enthusiastic buyers of these single stocks down here?

My thinking is no.

So there we go, a few idiosyncratic reasons as to why the dollar is going higher, and reasons to be a tad cautious right now.

I'll finish with another diagram we did...

'Perhaps coming into year end, some who have had a very good year might start booking profits before Christmas?,' Tim says...

Nothing like price falling to turn people cautious.