King Dollar that saw a 20% rise in the world’s reserve currency (our currency, your problem) died in late September 2022 and the greenback is now 8% below its high on US dollar index (DXY). All G10 currencies have risen at least 7% against the USD. So its weakness is just not limited to the Euro, yen or the post Liz Truss sterling. Econometric models, various PPP indices and even the Big Mac index suggested that King Dollar was grossly overvalued at DXY 114. Yet a sequence of world events precipitated its dethronement.
One, Britain’s sterling crisis ended when the Tories booted out Liz Truss after 44 days in 10 Downing Street during which she managed to bury the Queen, the UK economy, the Conservative Party’s chance to win the next election and pound sterling. The snap back in sterling from 1.04 to 1.2145 on cable as Rishi Sunak abandoned Truss’s neo-Thatcherite economic delusions in favour of fiscal orthodoxy and the Bank of England finally tightened monetary policy to combat the most virulent inflation surge in western Europe coincided with the peak in King Dollar.
Two, by October Brent crude was in a free fall after its $125 peak in June on recession risk and Putin’s failure to freeze the EU in winter by weaponizing the Kremlin’s natural gas exports. The Ukraine military’s spectacular battlefield victories in Kharkiv and Kherson cut the geopolitical risk/safe haven demand for the US dollar.
Three, The ECB finally began to match the Fed’s hawkishness with its 0.75% rate hike even as the US Treasury minus German bund interest rate spread and Europe’s terms of trade shock peaked at a time when the Euro was 40% undervalued on the OECD’s own econometric model. The German Chancellor’s state visit to Beijing and China’s U-turn on its Covid lockdown policies is unquestionably bullish for Old World risk assets and the Euro. Ergo Euro is at 1.0750 after the 20% rally in the Stoxx 600 led by the luxury colossus LVMH. Mao said the East is red, I say the East is green as the Shanghai Comp, Alibaba/Tencent/JD price chart and Hong Kong red chips index attests.
Four, my studies in Vedic numerology suggest that the yield on the 10 year US Treasury note peaked at 4.33% on the same day as the dollar/yen peaked at 151.25. It took a few days for me to consult some brilliant leveraged avatars and hedge fund rishis on Planet Forex about this cosmic event but its implications were crystal clear to all us devotees of the sacred mathematics that governs the universe. I must concede that Governor Kuroda-san at the Bank of Japan amplified the magnitude of the long yen profit with his shifts on Dai Nippon’s yield curve control strategy. The rules of the game on the yen had now changed in the celestial islands that are the tear drops of Amaterasu, the Shinto sun goddess. All I can say to the Empire of the Rising Sun is domo arigato for yen trade and tennoheika banzai on CPI.
The Wall Street adage that the big money is made when things go from Godawful to just plain awful was never more true than in the performance of value stocks and EM/China since early November. While the Russell 3000 growth index lost 30% in 2022, Russell Value was down only 8%.
China’s U-turn on Covid lockdowns after Xi secured a third term as President with a loyalist Politburo triggered a 40% plus rise in MSCI China for US dollar investors. I had flagged the opportunity to nibble in China in late October as the PBOC, with no inflation constraint, eased monetary policy and the State Council set up a $35 billion funding line for debt laden property developers as well as fiscal support to boost consumer spending at a time when Chinese household savings since the pandemic exceed the GDP of Britain, which now has its first Pakistani descent Prime Minister since Rishi Sunak’s grandfather hailed from Gujranwala, the birthplace of Maharajah Ranjit Singh. (IPA Service)
By arrangement with the Arabian Post
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