"Very Long Term US Dollar DX Index Chart, and Two Dollar Charts From the Fed" - Jesse's Cafe Americana

Jesse is one of the best economic and financial bloggers and he periodically puts out an updated very long term dollar chart. I personally recommend reading Jesse's blog every day. Its a great source for commentary on this site in my opinion.

22 April 2011

Very Long Term US Dollar DX Index Chart, and Two Dollar Charts From the Fed

The DX Index I normally show is the continuous futures contract on the DX index. The front month is now June.

The Fed also publishes two other dollar indices: major currency index, and the broad currency index. The major currency index is essentially the basis for the Wall Street DX futures index.

I have included charts of both of these Fed dollar indices below.

“If those in charge of our society - politicians, corporate executives, and owners of press and television - can dominate our ideas, they will be secure in their power. They will not need soldiers patrolling the streets. We will control ourselves.”

Howard Zinn

Carry Trade Unwind to Collapse Commodities

Commodity Correction Will Last All Summer As Massive Carry Trade Unwinds

Approximately half of QE2 ended up as foreign bank IOeRs (see John Mason: "Large Foreign-Related Banks Now Hold $776 Billion in Cash Assets".

Any forex trader understands the significance of these shifting balances (that the relative increase in the volume of foreign short-term claims (vs. long-term investments), presages currency conversion), & a weaker dollar.

Indeed, QE2's distribution channel was international: “according to the Wall Street Journal Europe, all of the top ten dealers in the foreign exchange market are also primary dealers (the sellers in QE2's asset swap), and between them account for almost 73% of forex trading volume”

Current account balance students (our chronic balance-of-payments deficit), understand floating exchange rates, the opportunistic carry trade, & the prospect of currency attacks.

For the very short run our trade deficits have kept prices and interest rates lower than they otherwise would be, and they have subsidized our standard of living. But these deficits are inexorably forcing the dollar down in terms of its foreign exchange value—and no consortium of central bankers, treasury secretaries, et al. can stop the process. I.e., QE2 was undeniably a trigger & contributor. And the trend will reverse once QE2 ends.


"UBS, such unwinding will become a reinforcing trend as the end of QE2 reverses capital flows into Treasuries, which, along with the overextended, overcrowded, and exceptional short positions in the U.S. dollar, will create a feedback loop"

"yields will rise with the end of QE2, adding that a shift in portfolio choices will occur, “forcing portfolios to shift up the risk curve” and reversing what have been massive outflows of QE2-generated capital and liquidity, directly boosting the dollar"

"[The end of QE2] forces emerging market central banks to retire domestic currency as the dollars exit, leading to stalling bank deposit growth and stalling loan growth. And this in turn triggers a reversal of speculative flows"

"The killer blow, though, will be delivered by monumental unwinding of “short dollar” positions, coupled with all its correlated trades...and we suspect that short dollar trades, and risk trades that are set to benefit from dollar declines are now heavily crowded across all asset classes"

What Now... Cash

What Now... Cash Cow?

Excellent analysis, Flow5. What now? As originally predicted, all the wagons are full of passengers (investors) and rolling downhill without horses or drivers. Where do you think money is going? The same goes for stocks, bonds, metals, traditional commodities and executive positions. How can a corporation be solvent when it's sole holding is "preferred" stock? It can't.

Given the proximity to ZERO and/or non-existence, depending on the investment type, the better bet was shelved in cash with a paper record and non-traditional commodities in things people need and use. Sorry, gold and silver are NOT street-friendly items... a pair of well-made properly fitting shoes-- are. It may come down to that, it has before.

The paper-pushing movement is nearly over. The return to craft and self-sufficiency is upon us. What can you make without the international supply chain putting it on your platform?

END of QE2

JOHN MASON 5/16/11:

"Over the past thirteen week period the Federal Reserve has pumped roughly $350 billion of excess reserves into the banking system. From February 2, 2011, to May 4, 2011, cash assets at commercial banks rose by $400 billion.(Cash assets at commercial banks can serve as a rough proxy for the measure excess reserves.)

During the same time period, $306 billion of the $400 billion increase in cash assets of commercial banks in the United States went to foreign-related financial institutions.
On May 4, 2011, of the $1,586 billion of cash assets in commercial banks in the United States, 50%, or EXACTLY HALF of these cash assets, RESIDED ON THE BALANCE SHEET OF FOREIGN-RELATED FINANCIAL INSTITUTIONS.
The quantitative easing of the Federal Reserve continues to support, in large part, the “carry trade” where funds generated in the United States continue to find their way into foreign markets.
This is not the first time I have written on this subject: Actually, this is the third time I have written about the subject.
Over the past four-week period, cash assets at all commercial banks actually declined by about $9 billion. However, cash assets at the foreign-related institutions rose by $27 billion during this time period while cash assets at the largest 25 commercial banks in the United States fell by approximately $21 billion and they fell at smaller domestically chartered United States banks by $14 billion"


May 14, 2011
By Lee Adler

"...That’s when we’ll enter a brave new world. The markets need these cash pumps just to give the appearance of stability. Their absence will allow the markets’ structural instability to show itself. Instead of being delicately balanced on streams of POMO applied at just the right times, they should just topple over. But first we have 6 MORE WEEKS OF THE BALANCING ACT.
The POMO schedule for next week calls for only $15-22 billion in gross aid. Because $6 billion in GSE paper will mature, net POMO will total “just” $9-15 billion, so the market’s performance in light of that should give us an interesting perspective. If the market can’t hold up with $9-15 billion of support from the Fed, how will it do with none?
Primary Dealers are handing over their long term Treasury paper to the Fed as fast as the Fed will take it, and interestingly the dealers are not replacing it. PD inventory of Treasuries is crashing. This looks like distribution. They are piling up cash at a breakneck pace. But to what end? Are they preparing for the apocalypse come the end of June, or are they preparing to buy massive amounts of Treasury paper once the Fed leaves the market. The answer to that is a no brainer, but The Street wants us to believe otherwise.
Wall Street keeps telling us that there will be plenty of buyers for Treasuries once the Fed stops POMO. All the evidence that I now see points in exactly the opposite direction. Not only are the PDs treating Treasury paper like last week’s garbage, banks in general are also dumping the stuff. Only foreign central banks have been good public servants picking up tons of the stuff in recent weeks, but even that appears to have stopped. If they go on strike, it will be a catastrophe for the market"