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Risk to systemic stability in global finance

It is ironic that the US Dollar Index (DXY) rose to 92.85 even as the yield on the 10 year US Treasury note tanked from 1.75 in March to as low as 1.26 last Thursday.

Economic data, high yield credit spreads and the TIPS inflation breakevens convinced me that the fall in bond yields had less to do with shifts in Federal Reserve monetary policy or inflation/growth expectations and everything to do with liquidity flows, Japanese institutional buying, a post tax season decline in Treasury bill issuance and the usual short squeeze on Wall Street once positioning became extreme.

I suspect political risk also played a part in the Euro’s decline since March as it is all too probable that the Greens will be a part of the German ruling coalition in September, a prospect that does not bode well for classic Bundesbank preference for hard money anti-inflation policies, austerity and obsession with Club Med’s alarming post-COVID sovereign debt ratios, notably in Super Mario’s La Bella Italia.

The global spread of the Delta Strain and a surprise Chinese banking system RRR cut have also increased the risk to systemic stability in global finance and the greenback has been its beneficiary.

The US Dollar Index is really the Euro in drag since the single currency born of the Maastricht Treaty constitutes no less than 57% of the fabled index (DXY). So I was alarmed when DXY rose as high as 92.85 last week though Friday’s U turn in bond yields/global equities ensured that DXY ended the week at 92.10, what next?

There is $120 billion in Uncle Sam IOUs that need to be sold by Wall Street’s primary dealers in govvies, so I suspect that the yield on the 10 year bond will move back up to the 1.50 to 1.60 range. This will be good news for global equities as the spike in asset class volatility reverses. Hence I expect the US Dollar Index to move well below its 20 day moving average at 92.00. This is confirmed by the fact that the MACD/slow stochastic have now peaked and points to 91.40 as the next target. This is the reason why I thought that the Euro was a low risk buy at 1.1840 for a (hopefully) 1.20 target sometime before Cancer surrenders to Leo, the Zodiac sign of my global tribe of Assads. I do concede that Jackson Hole could change everything since the ECB will tilt to its bias for a 2% inflation target.

At current levels I can also see sterling (cable) rise well beyond 1.40 as its Friday close was a credible two week high. I doubt if we get to the June, post Brexit high of 1.4250 in the next two weeks though I have learned the hard way to never say never on Planet Forex in the reign of King Bo Jo though everything will change once his future nemesis Lord Zo Pa, Earl of Kanglashire, Sultan of Multan/boy wonder of Dawn Capital beats him to win Downing Street and the sceptred isle.

For now, stay long the quid!

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