The recent bond and US dollar ( DX=F , DX-Y.NYB ) sell-off is raising alarm bells, with some even questioning if the US is starting to resemble an emerging market.
Bannockburn Global Forex chief market strategist Marc Chandler joins Catalysts to share what’s really driving the moves in FX markets and why capital flows may be shifting.
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I want to talk about the degree to which the sell-off in bonds and the US dollar is impacting your view of the US. I've seen some notes, some sources joking and some being serious with me that the United States is heading towards an emerging market status. Do you think that this sell-off in bonds and the US dollar is that severe?
I do think it's severe. I think that this talk about emerging market is meant as an insult, and I don't, I don't really know what it really mean. Uh, does it mean that our per capita GDP is falling? No. Does it mean that, uh, what is it really mean? And I think that, uh, the real concern, I think, is that we do know that Canadians and Europeans are boy consumers, are boycotting US goods. We also know that the travel plans to the US, those bookings have fallen sharply. What people are concerned about is that maybe we're seeing a capital strike against the US, where large pools of capital are selling US assets and taking their money home. And this is, to me, the problem with this is two things. One is that we don't really have any hard data on capital flows that are in real time. And secondly, I think that the political climate is such in the US where it's almost like a knee-jerk reaction to blame foreigners for what ultimately the US problem. So for example, in the US Treasury bond market, it looks to me, and apparently other people, that real pressure is coming from the unwinding of these basis trades, which is just a complicated, uh, financial, financial speak really for this trade between Treasury cash bonds and the futures market. And this is done by large pools of capital like hedge funds.
What trade is working really right now in the FX market, working really well, and why do you think that's the case?
Well, I say the two strongest currencies, uh, have been the Japanese yen and the Swiss franc. And I think that those are the strong ones because, think again, you know, when we as individuals, retail investors, we buy a stock, we want that asset to go up. But these large pools of money, when they really make these decisions, it's really about OPM, using other people's money, to basically borrow, like borrow the yen, borrow the Swiss franc, and use those, but borrowing means it's partly selling. And you're short, so you're using those proceeds to buy a higher yielding asset, like US Treasuries or US stocks. And as those assets that you bought invariably go south or go against you, you have to buy back the funding currency. The Swiss franc and the Japanese yen are very low yielding. In fact, the Swiss have 25 basis point overnight money. And that, and that, I think, is the primary cause of what's going on. It's not so much safe haven. It's really the unwinding of these structured funding trades, again, by these large pools of capital.