Reports of the U.S. Dollar’s death are largely exaggerated

 

July 27, 2020

by Rob Zdravevski

Probability is increasing that the AUD (versus the USD) is reaching a peak.

Although its not an all in bet, my strategy has been to Sell AUD / Buy USD at 0.68, 0.71 and then 0.75 (if it touches that level) will bode well for investors.

Structurally, I am a US Dollar Bull.

Equally I was prompted to write the following comments in reply to an email received last week asking for my view about this article recently published in the Australian Financial Review.

http://www.afr.com/opinion/columns/why-the-covid-currency-shock-will-be-made-in-america-20200712-p55bgu?btis

to which I wrote,

I disagree with Stephen Roach’s argument and more so with his case being mainly based on a declining savings rate.

There are larger forces at play than personal savings rates.

The US Dollar provides the whole world with an insurance policy,

as the largest denomination involved in cross bank lending and int’l debt securities, there will be a perpetual need to buy USD to either acquire debt and/or service interest payments.

The “printing of money” is not just a USD phenomenon but rather it has been a relative exercise of increasing M2 money supply amongst many central banks.

and as Foreign Exchange is relative trade and asset, if you sell USD what is the other currency will you Buy ? The Euro ?

C’mon, why give up the safety and might of the US Dollar for Euro, Yen or Pound ?

The expansion of USD (M2) Money Supply has been omnipresent for 10 years yet the currency remains strong and well bid.

As has the expanding money supply amongst the aforementioned currencies.

At this stage, I want to paraphrase HSBC FX Strategist, David Bloom.

The predicted demise of the U.S. Dollar and reports of its death are largely exaggerated.

The Dollar has no other challengers on the world stage;

The United States just saved the world with its cross currency swaps and people think this will be its undoing.

The Dollar will remain the centrepiece of our financial architecture within our lifetime.

I’ll conclude by saying, that inversely, a falling USD will tend to correlate with rising commodity prices. It’s difficult to believe there will such rampant demand across the commodity complex over the next 2-3 years (in line with Mr Roach’s timeframe) especially within a COVID-19 world of delayed capital expenditures and frugality.

As far as the Renmimbi is concerned, its time may come in 20 or 30 years but not now.

by Rob Zdravevski

Rob Zdravevski

rob@karriasset.com.au

Global Investment Advisor at Karri Asset Advisors

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