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Song of the Week - Gregory Isaacs - One One Cocoa
Table of Contents
USD Squeeze
Economic Calendar
Canadian Interest Rates
European Interest Rates
Japanese Interest Rates
Crypto Macro
Conclusion
1. USD Squeeze
So, last week, the bank of Japan intervened in the FX markets again to the tune of several hundred billion dollars. I was looking for evidence of where they may have taken this liquidity from and while I was looking at one of the Federal Reserve swap desks I noticed this.
No, the bank of Japan wasn’t swapping a significant amount of their treasuries to the Federal Reserve directly, but who is? The Swiss. We covered their usage of this swap desk about 7 days ago when they hit a record of $6.27b in swaps in a single week. Well, last week that figure hit $11.09 billion in swaps. Some one in Switzerland has been depleting the countries FX reserves, the biggest culprit here is Credit Suisse and plausibly several other banks tangentially associated with Credit Suisse. Officially 17 entities participated in the dollar auction for these assets, but it’s quite possible that of the 17 entities, a number of them could be subsidiaries of a single entity, plausibly Credit Suisse.
In last week’s treasury auction post I included a quote from Joe Biden. Asked if he was concerned about the strength of the dollar, Joe Biden responded that (paraphrasing) he was not concerned about the strength of the dollar, but concerned about the rest of the world.
Speaking explicitly of the present, with no concern for the future, this is a correct statement. Right now every central bank is finding demand within their own country for US dollars is going up. Why? Many of the entities in those countries have US dollar denominated debt, and that debt has gotten far more expensive to service as rates have risen. Either because those entities have taken on leverage that was only sustainable with rates at or below 0%, or because the debt was used to purchase businesses, properties, or assets that are not generating enough revenue to pay off their debt. A corporation that does not earn enough money to pay off it’s own debt is called a zombie corporation. As rates rise, companies that were on the cusp of being zombie corporations, become zombie corporations.
The only solution is to either acquire dollars and pay off your debt, which means corporations depleting their treasury to pay off debt if they have it. As we’ve covered previously, Corporations don’t hold strictly cash, they typically hold a blend of cash and yield bearing US treasuries in lieu of cash. So when a corporation is depleting their treasury to pay off debt, it means they are selling bonds. This all adds up with Quantitative Tightening, and foreign divestment to create the most volatile bond year on record, and also the worst year for bonds since 1788.
It’s one hell of a squeeze. Entities with debt, are trying to acquire as much USD as they can to pay off that debt. Countries trying to protect their currencies from a strengthening dollar have to dump their treasuries to acquire dollars just to sell them. And the few entities in a healthy cash position now who would otherwise be investing into new developments are instead being forced to invest into the bond market due to rising yields.
For now, this all points to one thing, which is a rising dollar, which is why the macro has been flat/down all year for basically all assets. If the US could continue doing this without putting the treasury at risk, there would be no problem and we would all just be acclimatizing ourselves to a new fiscal environment. But the US can’t continue this, and once everyone who can reposition themselves does so, only for the treasury to pressure the Fed to reverse course, this liquidity wave is most certainly going to have to reverse. If this liquidity wave does not reverse at some point it would literally be the end of the western financial world. But for now, dollars are in short supply and hard to come by in the asset markets, while they are abundant in the consumer markets where goods and services are in short supply in the west.
This is the current moment that Joe Biden is talking about. But just as in February and March he was celebrating the short term drop of the Russian Ruble early and we watched the Ruble outperform the dollar afterwards; we’ll see a similar thing happen here. Right now this is everybody else’s problem and not our problem. Quite soon this will become the US Treasuries problem, and if we solve it in the only way that a Western Eunuch knows how, it will soon become strictly our problem and Biden will find himself having once again celebrated an economic victory far too early as we watch it become an economic loss.
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