War Room
Future of USD
30 July 2014
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Future of USD
I.
Market Update
II.
Future of USD Scenarios
III.
USD Economic Relationships
IV. Reserve Currencies of the Future
HiddenLevers
MARKET UPDATE
Market Update
Obama Checked Out
QE Ends in October
sources: HiddenLevers, WSJ, CNBC, Real Clear Politics, Guardian, Bloomberg
Q2 GDP – a perfect 4.0
Russia Sanctions Piling Up
Macro Snapshot
Is RUT a harbinger or just mean reversion and why is 2/10 spread narrowing?
HiddenLevers
FUTURE OF USD – SCENARIOS
Benign Decline
USD index = 70
similar decline
to 2002-07
market upswing
slow + steady
USD decline
USD = -13%
source: HiddenLevers
Europe
currencies +
gold increase
modestly
USD decline
+ GDP growth
would boost
commodities
USD decline
would match
2008 low
End of QE Strengthens Dollar
rising rates
mean higher
demand for USD
USD post-QE 2
has been
volatile but up
USD strength
would match
mid 2000s highs
growth scenario
muted impact
on commodities
Europe
currencies +
gold suffer
source: HiddenLevers
USD Index = 90
equities
correction
would further
boost USD
USD = + 11%
Reserve Currency No More
USD Index = 55
global power
structure is
changing
drastic
unwinding
+
viable options
USD decline
would match
early 2000s
decline
plausible trigger
USA/China
geopolitical
tension
plausible trigger
debt default
USD = -32%
sources: HiddenLevers
Scenario: Future of USD
Good
benign decline
Neutral/Bad
end of QE
strengthens USD
Ugly
reserve currency
no more
As the economy
strengthens, the
dollar might fall as it
did in the 20022007 period.
Rising rates may
drive investors to
hold more USD
securities, raising
the dollar’s value
and forcing
commodities down.
If US fiscal issues or
other concerns
cause foreign
holders to dump
USD, an inflation
shock could derail
the markets.
$
HiddenLevers
USD ECONOMIC RELATIONSHIPS
USD + Interest Rates
Pre 2008
rising rates = rising USD
Post 2008
inverted relationship
Why?
USD as safe haven for EU crisis
2014
another
inflection
point?
sources: HiddenLevers
USD + Quantitative Easing
QE 1 + 2
USD driven down
QE 1
sources: HiddenLevers, Financial Sense
QE 2
QE3
Taper
QE 3 + Taper
USD only gets
stronger
USD + Equities
During flight-to-safety
period starting in early
2008, USD + S&P had
strong inverse
correlation
Rolling correlations show that
this relationship flips over time,
and turned positive with latest
S&P leg starting late 2012
But a correction could quickly
restore flight-to-safety dynamic
sources: HiddenLevers, Bespoke Investment Group
USD + Commodities/FX
USD generally has a
strong inverse
relationship to oil and
other commodities –
traded in USD terms
• Euro/USD: perfectly
inverse
• GBP inversion with USD
strengthened since 2008
• JPY non-correlated to USD
sources: HiddenLevers
HiddenLevers
RESERVE CURRENCIES OF THE FUTURE
USD = The Classic Reserve Currency
Foreign Held Assets
Value (USD)
US Treasuries Abroad
5.6 trillion
US Cash in Foreign Exchange Reserves
3.8 trillion
Gold Held in Foreign Reserves @ $1,300/ounce
0.97 trillion
US 100$ Notes Held Abroad
0.64 trillion
1/3 of US Treasuries
Held Abroad
Currency Composition (%) of Foreign Exchange Reserves
USD makes up 61% of
Foreign Exchange
Reserves
Foreign banks hold 10x
more USD + Treasuries
than gold
source: US Treasury, IMF, Planet Money
BRICS Bank – announced July 2014
28%
BRICS share of
world GDP
19%
USA share of
world GDP
global power
structure
changing
Obvious
response to IMF
imbalances
IMF type
institution
for EM, by EM
IMF/World
Bank
BRICS Bank
(NDB & CRA)
12 trillion
150 billion
11.03 %
100%
16.8%
0%
Total Reserves (USD)
BRICS Vote (%)
USA Vote (%)
source: Forbes, IMF, Banker Magazine
China
contributing
50% of money
BRICS Bank
currency TBD
Reserve Currency of the Future – Yuan?
World’s Top 10 Banks
1994: 5/10 banks in Japan
2004: 10/10 banks in USA
2014: 5/10 banks in China
sources: HiddenLevers, The Finanser, Banker Magazine, The ABC
Yuan + USD
travelling
together past
12 months
bank profits
surpassing
pre-crisis
peaks globally
China’s banking
system may be
world’s largest
by 2020
Japan bank
capital now
50% of China
China bank
profits
accelerating as
economy slows
only comparable
bank profit
recovery = USA
Future of USD – Recap
USD strong through equities rally
Interest rates + USD
back to direct relationship
USD resilient through
changing times
China banking might
think present, not future
HiddenLevers Use Cases
Future of USD
scenario
Future of USD
scenario
End of QE
scenario
Global
Deflation
data center
Currencies
macro theme
Stronger USD
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