Juggling Dynamite

After weakening since the end of March, the US dollar index had the most negative month in a decade in July as US Treasury rates slumped, government spending leapt and plunge protection teams pumped equity futures nightly.

The consensus is now betting on more of the same. As shown on the left, courtesy of the Wall Street Journal, net short positions betting on a weaker greenback today are the largest since the second quarter of 2018 (just before the dollar bounced and risk markets tanked). The latest second-quarter positioning looks similar, see Behind the vast market rally: A tumbling dollar:

Hedge funds and other speculators are favoring everything from the Swedish krona to the Brazilian real, positioning for more dollar weakness. Net investor bets on a weaker dollar recently climbed to their highest level since April 2018, Commodity Futures Trading Commission data compiled by Scotiabank show.

“We are in a stage of very high momentum,” said Ed Al-Hussainy, senior interest-rate and currency analyst at Columbia Threadneedle Investments. He is betting that emerging-market currencies such as the Mexican peso and South African rand will extend their recent rebound. “Everybody is getting caught up in it.”

As the dollar has slumped since March (blue line below), risk assets priced in dollars have staged their typical inverse move, as shown below in my partner Cory Venable’s chart with gold bullion (in orange), copper (in brown) and S&P 500 (in red) leaping (along with most other commodities and cryptocurrencies).
What happens next should be top of the risk management agenda for everyone. The dollar is still the global reserve currency, and the next bounce from oversold conditions threatens carnage for assets on the other end of the teeter-totter.

In 2019, eighty-eight percent of global trade was conducted in the US dollar along with sixty-one percent of all foreign bank reserves and nearly 40% of the world’s loans. To make payments, debtors and buyers of goods and commodities priced in dollars need to acquire the currency through incoming trade flows or selling other assets and currencies. Less global trade means fewer dollars circulating into the hands of those needing them for payments. This is why recessions trigger waves of desperation for dollar liquidity and panicked selling of other assets to get cash.

The corona crisis has accelerated a global trade slump with an unprecedented 92.9% of countries in recession in 2020–well above the 83.8% high recorded during the Great Depression and the 54.3% average of the 15 global recessions since 1871.

The present ‘greatest recession’ is still unfolding, and the next wave of dollar strength stalks risk assets everywhere. Lest we forget.

Never before have prospective vaccines for a pathogen entered final-stage clinical trials as rapidly as candidates for Covid-19.  Hopes and stakes are incredibly high.

For an excellent update on the most technologically enabled race for a vaccine in human history read ‘A huge experiment’: How the world made so much progress on a COVID-19 vaccine so fast.  Still, even best-case scenarios require realism:

A vaccine that prevents even 50% of infections would be a massive lifeline. But experts worry there’s a disconnect between a public expecting vaccines to instantly reset their lives and what the first vaccines may actually allow. Successful vaccines will likely be restricted to frontline workers and vulnerable populations at first. It could take some time for enough vaccine to be made for everyone who wants a shot. Some vaccines might require two doses to confer protection.

“It might not be some magic bullet that’s going to stop the pandemic in its tracks, and people need to be prepared for that possibility,” said Columbia University virologist Angela Rasmussen about the first vaccines that reach people. “I really hate the term vaccine race. Because that implies there’s going to be a medal ceremony, and the pandemic is over.”

The shift of production back to North America and Europe is a macro theme with legs.  First, came trade disputes and rising protectionism along with steadily rising emission restrictions and carbon taxes that make international shipping more expensive.  Next, COVID-19 showed the west its vulnerability in having essential equipment, supplies and medicines made far from home in places like China. Now, record flooding is compounding risks to current supply chains.  The world’s second-largest and most highly-indebted economy has swooned in 2020–and the hits keep coming.

The worst flooding in six decades in China is displacing millions and straining the Three Gorges Dam. WSJ’s Jonathan Cheng explains how the natural disaster is hampering the country’s efforts to restart an economy already battered by the coronavirus pandemic.  Here is a direct video link.

The mammoth Three Gorges Dam has long been rumoured to have been poorly constructed and vulnerable to disaster (see Three Gorges Dam could collapse).