Post Tagged with: "currencies"

The country to watch in 2017 is Turkey

The country to watch in 2017 is Turkey

If I could name three countries that will be particularly difficult for the US to deal with geopolitically, I would pick Russia, China and Turkey. The first two are obvious choices but the third is going to be equally tricky because of the increasingly heavy-handed way Turkish President Erdogan is cracking down on alleged Gulenists in the aftermath of last summer’s attempted Coup d’etat. It is Turkey’s unique relationship to the West via NATO and the increasingly authoritarian rule which will make the relationship tricky in 2017.

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Monetary offset, the strong dollar and China’s currency manipulation

Monetary offset, the strong dollar and China’s currency manipulation

With the Fed talking up the likelihood of three rate hikes in 2017 while other central banks are still in easing mode, the potential for a US dollar rout and a concomitant closing of the US trade deficit is pretty low. Therefore, given Donald Trump’s hawkish rhetoric on China, the potential that the US government labels China a currency manipulator for the first time since 1994 is high.

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Policy divergence, the strong dollar and trade war with China

Policy divergence, the strong dollar and trade war with China

I have heard some commentators say that the concern over a strong dollar is overblown. I don’t think it is. In the context of heightened tensions with China, the strength of the US dollar will be a key issue affecting Asia in particular. I want to flesh out a few thoughts here, especially regarding the pivot by the US toward Russia and away from China.

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The dollar bull market will eventually break something

The dollar bull market will eventually break something

With the fed having raised interest rates for the second time in ten years, in an environment in which US growth looks pretty good, we should expect more hikes to come. The question is whether the economy can withstand the hikes and what they would mean for markets. I have five asset classes to watch: Treasuries, the US Dollar, Emerging Markets, the Japanese Yen, and Gold.

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The EU as a larger Germany post-Brexit and Hugh Hendry’s Eclectica Fund commentary

The EU as a larger Germany post-Brexit and Hugh Hendry’s Eclectica Fund commentary

Stocks have mostly recovered since Brexit and the strong dollar and Yen have reversed much of their overvaluation in recent days. The question remains as to what the fallout from the UK’s departure from the EU will be. I continue to believe the near-term economic impact will be muted, and that Brexit will come to be seen as mostly a political event. But it is a political event with wide-reaching potential ramifications.

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Leading UK PM Brexit strategies taking shape with May and Leadsom

Leading UK PM Brexit strategies taking shape with May and Leadsom

At this juncture, the leading candidates for British Prime Minister are both women on either side of the referendum vote. However, both are saying they will guide the UK out of the European Union. Meanwhile Chancellor George Osborne’s fiscal stimulus looks set to concentrate on lowering corporate tax, which will continue to widen the income gulf, a major contributor to the vote to leave the EU. Markets have stabilized with the Pound taking the brunt of the post-Brexit fallout.

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The downside risks introduced by the UK Brexit referendum

The downside risks introduced by the UK Brexit referendum

The unexpected ‘Leave’ victory in the recent referendum on EU membership introduces considerable political risk by elevating tail risk scenarios to reasonable worst case status. However, in a global economy that is already slow and already lacks policy space, the referendum outcome also introduces economic and financial risk. Below I have some general thoughts on those risks, with the US dollar, Italian banks, and Japanese deflation foremost among them. At a later point, I hope to also go into some more detailed scenario handicapping.

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The German current account surplus requires deficits elsewhere

The German current account surplus requires deficits elsewhere

Germany is a member of a currency union over which it has no monetary authority. So no one can accuse the country of ‘manipulating’ its currency. Yet, Germany is displaying huge current account surpluses that are illustrative of a dangerous imbalance which when corrected will cause violent disruptions to trade and lead to populist and autarkic political rhetoric. This is what awaits us when the global economy slows further.

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Jensen: How long bonds could actually outperform equities

Jensen: How long bonds could actually outperform equities

The equity markets that have fallen the least so far are the U.S. and the Japanese markets. If my prediction that we are looking into a more difficult period in the U.S. (and the euro zone), U.S. equities look particularly vulnerable, so maybe Jeremy Grantham will be proven right after all. If you add to that the rather lofty earnings expectations for next year in the U.S. (chart 10), the situation only gets trickier.

Despite not exactly being dirt cheap at current valuation levels, I am therefore going to stick my neck out and suggest that long bonds could actually prove a better investment than equities – at least until we approach the bottom of this economic cycle.

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The strong dollar, the carry trade and market volatility

The strong dollar, the carry trade and market volatility

I have been meaning to write this post for a few days. And as the information comes in from Brazil, from China, from equity markets, it seems all the more compelling that this is indeed an important period in market and economic history. I would say the strong dollar is the genesis of a lot of this stuff and it is the unwind of multiple carry trades that is creating the market volatility. Some thoughts below

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If we don’t understand both sides of China’s balance sheet, we understand neither

If we don’t understand both sides of China’s balance sheet, we understand neither

These debt-related shocks will occur regularly for many more years, and each shock will advance or retard the rebalancing process so that it affects the way future shocks occur. There are only a few broad paths along which the Chinese economy can rebalance, and if we can get some sense of the China’s institutional constraints and balance sheet structures, we can figure what these paths are and how likely we are to slip from one to another. In order to get Chinas right I would argue that above all we must understand the dynamics of debt, and of balance sheet structures more generally.

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The Chinese currency crisis: a mental model on catalysts, contagion and vulnerability

Many markets have now recovered from the initial wave of selling associated with the Chinese mini-devaluation catalyst. This should be expected. Some of these markets will surely continue higher. Nevertheless, the Chinese devaluation still represents an important marker in terms of global economic vulnerability. And so I want to map out a mental model on how a crisis is transmitted and why I believe this is a crisis.

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