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12 Nov 2014
Global savings push the USD higher – SG
FXStreet (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale, notes that as the ECB and BoJ target implicitly their currencies one should not be surprised to see the USD bobbing up by default pushed by global savers while the ones on deficit must ultimately pay the price for steeper yield.
Key Quotes
"Flows used to go out of advanced economies into the faster developing EM helped by easy Fed policy and EM FX interventions. This "Bretton Woods 2" system broke down with US consumer leverage pre 2008 to re-establish itself. It continues to flourish with Canada the latest one to run a consumer leverage train.”
“However as the market recognizes that trend growth in EM has faded, the attractiveness of unhedged EM fixed income vs UST has diminished with far lower expected EM FX gains. This leaves more of advanced economy savings in advanced economy and hence mainly in the US. While foreign reserve growth diminishes, local investors may also be shifting more safe assets into the US.”
“The risk reward in long USD is likely the most skewed trade we have seen in a very long time (see survey) yet the only thing that can squeeze it is signs of a significant slowdown in the US suggesting deep long term downside in usd crosses may not be a bad hedge.”
“The USD continues to bob up, further signs of a US recovery will only confirm the trend.”
Key Quotes
"Flows used to go out of advanced economies into the faster developing EM helped by easy Fed policy and EM FX interventions. This "Bretton Woods 2" system broke down with US consumer leverage pre 2008 to re-establish itself. It continues to flourish with Canada the latest one to run a consumer leverage train.”
“However as the market recognizes that trend growth in EM has faded, the attractiveness of unhedged EM fixed income vs UST has diminished with far lower expected EM FX gains. This leaves more of advanced economy savings in advanced economy and hence mainly in the US. While foreign reserve growth diminishes, local investors may also be shifting more safe assets into the US.”
“The risk reward in long USD is likely the most skewed trade we have seen in a very long time (see survey) yet the only thing that can squeeze it is signs of a significant slowdown in the US suggesting deep long term downside in usd crosses may not be a bad hedge.”
“The USD continues to bob up, further signs of a US recovery will only confirm the trend.”