Date: August 12, 2019
The Dollar Looks Like a Wrecking Ball to Some Investors
“Donald Trump gets the headlines, but he’s not the only one worried that the dollar’s remarkable ascent is causing economic harm. Some even worry it could trigger a recession. It’s hard to characterize the rise as anything but historic. One long-term gauge of the greenback’s performance that stretches back to the late 1960s is having its best decade on record, emerging from the wreckage of the financial crisis with a 25% surge since the end of 2009. Another index from Bloomberg bottomed out a few weeks before the U.S. lost its AAA rating from S&P in 2011, only to jump 32% since then as the dollar trounced every other Group-of-10 currency along the way. But what’s good for dollar bulls is bad for many others. The surge tends to erode the profits of U.S. multinationals that help power the world’s largest economy, and also raises costs for foreign corporations that have trillions of dollar-denominated debt. This is all especially problematic today amid growing signs the global economy is teetering on the edge of a recession. Coca-Cola Co. is among those feeling the pain, to name one prominent example. The Atlanta-based beverage giant recently noted the headwind it faces from the strong dollar — though it’s expecting this to ease soon. The U.S. president often complains about the rally, including last week when he said it undermines American manufacturers like Caterpillar Inc. and Boeing Co. “Where the dollar is now could push the global economy into a more difficult situation and raise the risks of a recession,” said Hans Redeker, Morgan Stanley’s London-based global head of FX strategy. “Any further appreciation could be challenging.” Granted, not everyone sees the greenback as a recessionary trigger: Bank of America global economist Aditya Bhave says the U.S. economy is not overly reliant on exports for growth. Morgan Stanley’s Redeker and Brandywine Global Investment Management’s Jack McIntyre, by contrast, see the dollar as a potential catalyst for the next U.S. and global recession. Anticipating the dollar could wind up a victim of its own success, McIntyre is bracing for the currency to drop 25% in the next five years and says his firm has been buying South Korean won, Czech koruna and New Zealand dollars over the past month to prepare. Morgan Stanley strategists recommend the yen and Swiss franc. For Redeker, the dollar may act as a potentially negative force on the balance sheets of corporations outside the U.S. According to the Bank for International Settlements, dollar-denominated liabilities to non-bank borrowers outside the U.S. reached $11.8 trillion as of March. Redeker says the rising greenback has already spurred a slump in capital expenditures throughout much of the world that’s led to deleveraging by corporations based beyond America’s borders.”
U.K. Doesn’t See EU Moving on Brexit for at Least a Month
“The U.K. government doesn’t expect the European Union to shift its position on Brexit for at least a month, a person familiar with the matter said. Prime Minister Boris Johnson is insisting the EU must reopen the Withdrawal Agreement it negotiated with his predecessor, Theresa May, and drop the so-called Irish backstop, a fall-back position designed to keep the border with Ireland open. That’s something EU leaders have said they won’t countenance. Johnson has said the U.K. will leave the bloc “do or die” on Oct. 31 — if necessary, without a deal. But members of parliament who oppose a no-deal Brexit are plotting ways to frustrate the premier. EU leaders are waiting to see if those MPs, including members of Johnson’s own Tories, are able to use proceedings in the House of Commons to tie Johnson’s hands, according to the person, who declined to be named discussing government thinking. Sept. 9 is shaping up to be an occasion when those rebels could act, they said. That’s because under an amendment to Northern Ireland legislation forced through by rebels last month, the government is required to make a statement on Sept. 4 about progress toward restoring the Northern Ireland Executive, and hold a debate five days later. No-deal opponents could use that debate to seize control of parliament’s agenda, a necessary first step to blocking no-deal. The debate, and votes around it, will be a first indication of the strength of opposition to no-deal in parliament, and whether there is a route to tying Johnson’s hands. After that, the EU will have a clearer idea of what parliamentary rebels are able to do, the person said. While Johnson has spoken by phone with EU leaders including German Chancellor Angela Merkel and French President Emmanuel Macron since taking office last month, he’s yet to meet them in person. He’s due to meet Macron and Merkel at the G7 summit in Biarritz, France at the end of August. The person said that Johnson is prepared to meet with leaders face-to-face to lay out the U.K. position, but that no negotiation is really possible until the bloc retreats from its red line on re-opening the Withdrawal Agreement. In the meantime, Johnson has announced a slew of domestic policy initiatives including hiring more police, expanding prisons and plowing more cash into the National Health Service. He’s made spending commitments to the tune of about 2 billion pounds ($2.4 billion) a week since taking office, fueling speculation he’s preparing for an early general election. “There’s been a whole series of these announcements and Boris doesn’t quite explain how he would pay for it,” Labour’s home affairs spokeswoman, Diane Abbott, told BBC radio on Monday. “This is a pre-election period. Even if he doesn’t go ahead and have an election in the autumn, he’s clearing the ground.” ”
China Is Saving Stimulus for Trade War Winter as Yuan Weakens
“Chinese policy makers are holding back from rolling out the big guns of monetary stimulus, keeping options in reserve as the trade standoff with the U.S. risks morphing into a global currency war. The People’s Bank of China late Friday called for a “rational” view on current headwinds, signaling that the targeted approach to shoring up output would continue. Investment, retail sales and credit data due this week are expected to confirm the ongoing slowdown in the world’s second-largest economy. Officials are sticking to a cautious monetary strategy even after tensions with the U.S. worsened, with President Donald Trump’s accusations of Beijing’s currency manipulation adding sensitivity to any stimulus measures that would depress the yuan. At the same time, the weakening of the currency past 7 per dollar removes one barrier for a cut to interest rates should the trade war deteriorate to the point where stronger action is needed. “Policy makers are fine with the current state of the economy,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “But if growth continues to slow, at certain point, the priority will shift to growth stabilization.” Former central bankers gathered for a policy symposium in the far North East warned Saturday that the confrontation with the U.S. is deepening. The U.S.’s labeling of China as a currency manipulator “signifies the trade war is evolving into a financial war and a currency war,” and policy makers must prepare for long-term conflicts, Chen Yuan, former deputy governor of the People’s Bank of China, said at a China Finance 40 meeting in Yichun, Heilongjiang. Former PBOC Governor Zhou Xiaochuan called for efforts to improve the yuan’s global role to deal with the challenges of a dollar-denominated financial system.”
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