International investors fear rise of USD Index

SGI

The rise of the USD Index (USDX) has never been good news for international investors, and it is even more volatile now as USDX, gold and US securities have been on the same track lately.

International investors fear rise of USD Index

On edge of financial crisis  

USDX reached 99 early on October 1 and if it exceeds 100 this year, it will be the first time after 3 years and the second time in 17 years that this index will have reached 100. It should be noted that 100 was its basis when USDX came into existence for the first time in 1973, before it soared to almost 165 in February of 1985, and plunged to 70 in April of 2008. This index reached 100 again for the last time in 2016, but it remained there for just a short time. That is, this index has been below the basis for most of the past 17 years.

When USDX increases, it usually causes a drop in price of goods and financial products, and vice versa, since USD plays a pivotal role in international commercial transactions, always taking up more than 90% of transactions. Even in the digital money market, there are at least four USD digital forms because USD is digitalized to make it convenient for digital money investors to participate in the market.

Although the rise of the USD Index (USDX) has never been good news for international investors, it has never been as risky as it is now when USDX, gold and US securities have been on the same track for several consecutive months. That is, the price of these products has been extremely high. Take gold for instance, if the highest price of gold this year is USD 1,550/oz, this is almost 25% from the record high in 2011, but USDX has increased by 20% over this period, so the gold price has now almost reached a record high.

It is obvious that several USD accompanying products are getting too expensive while the cash flow has recently been focused only on the purchase of gold and government bonds, causing a decrease or even minus interest rates, resulting in a fall in global liquidity. When these products are sold, they cause a plunge or even a crisis in the financial market. This risk is getting higher when the US Federal Reserve (FED) has continually lowered the interest rates, but USDX still rises. 

Possibly activate a wave of dumping

The derivative securities investors are now still betting on an increase in USD. It all started when FED lowered the interest rates, causing other central banks to do the same in an effort to make their goods more competitive. However, while inflation is low, the likelihood of an economic recession is more likely to cause a currency war than create a positive effect on the economy.

This is clear when the monetary policy has continually been loosened, but the growth has slowed down in several countries and the target inflation has failed across Europe to Asia. For example, Germany’s CPI has fallen to below 1% while South Korean CPI has had its lowest rate since it released its inflation data for the first time in 1965, and it is much lower than the 2% target set by the Central Bank (an annual rate of 0.7%).

The US securities are still making steady steps. Gold is going down, but it still has a bright future because the central banks and major financial institutions still buy gold. They have been buying it for two consecutive years and World Gold Council (WGC) data shows no sign of selling the product. Therefore, if USDX returns to 100 steadily, it may activate a wave of dumping of goods such as financial products while global liquidity is weak. The US securities are at record high, but USD is still higher. When it exceeds 100, it may disrupt the long path of US securities (more than 10-year growth, which is the longest in history). 

Effects of QE packages

After the 2008 economic crisis, FED continually lowered the interest rate to stimulate customer consumption and step by step activated other shots through Quantitative Easing (QE) packages. When the US and world economies began to improve, FED raised the interest rates again at certain times between 2015 and 2019. No matter how well FED has intervened with the global market, it has caused some chaos in the financial market. Not a few investors have gone belly up because they failed to catch up with the situation and did not understand the complicated financial activities created by giant investors.

Remember that there is no sustainable race without a break, and when this happens, the effects of the US market will cause negative effects on the rest of the world, including the international financial and economic markets.
The most horrible fact that many people do not know is the other side of QE packages, which enabled the US to move some of its difficulties onto other countries as well as export its inflation all over the world, simply because USD is the primary reserve currency and used in the largest payments in international business activities, and even the digital money market has digitalized this currency. These QE packages have been given beautiful “humanitarian” names such as aid packages, aid supply, poverty eradication aid, aid for consumers and companies, economic aid, or civilized stimulus.

When the US pumps some money into the market, for instance, not only the US but also other countries take USD loans. When other countries take loans (by issuing government bonds) to bring them home, they issue their national currencies and provide loans in their countries. Individuals and companies must have property as collateral mortgage before they can take loans, and FED continues to pump more money because the loans have property as guarantee. This process keeps going until inflation rises (i.e., the US inflation has been exported across countries), and FED begins to withdraw money, leaving huge piles of debt onto the world. The “sheep shearing and chicken driving” process is activated because people “forget pain when they are happy”.

History shows that the “sheep shearing” cycle takes place every 7-13 years, depending on economic events and reaction from the “sheep” and the “pack of wolves” and the “big boys”. Therefore, since 2009, Bitcoin has risen, as many investors have used it as a form of finance, independent of banks (both central banks, commercial banks and investment banks), without impacts from monetary crisis that banks are blamed for. This is considered to be a stronger fight for a free world without any control from the “big boys”, although it cannot replace USD in the short run, the digital money market has still not digitalized this currency through USDT (Tether), TUSD (True USD) or USDC (USD Coin). This will go on for at least one more cycle, or even several more cycles, because the US still maintains its strength through Token (electronic securities) or digitalized USD.

Additionally, in late September, FED New York suddenly pumped USD128 billion within 48 hours because the overnight interest rate suddenly increased from 2% to 10% and carried out a series of repo transactions. Particularly, FED provided cash in exchange for safe property such as government bonds, and corporate bonds continued to be maintained. Moreover, FED has also wanted to expand its program to buy property and increase the account balance. FED Chairman Jerome Powell described it as an “organic” process rather than the 4th QE (QE4). No matter what beautiful language is used to describe it, FED has gradually removed the “tight” program (reducing the amounts of held property) and begun to “loosen” and be more open with the use of policy tools besides the interest rate tool. 

Impact on Vietnam

After FED tightened the cash supply, other countries began to increase interest rates, new flow of cash has not been created, causing a halt or fall in prices of large amounts of property such as real property, securities, and other financial property which previously had their prices raised high. Even Bitcoin which is expected to grow in a free world has not escaped this impact, but it has even been labelled a giant Ponzi. The policies have now been loosened to avoid a recession, but USD has increased rather than decreased, causing cash flows to be poured into safe investment channels.

With the huge strength of the USD, there has usually been a movement every 10 years or so, calling for a substitute for the USD. The calls have recently come from China in a move to switch to the CNY, but it has not been successful.
So, where will the cash flows that have been removed from the financial market such as Bitcoin, securities and real property go? There will not be many safe places, but they will certainly find “hiding” places. It is obvious that large amounts of money have been withdrawn from markets, gold prices have risen, government bond interest rates have fallen, even to minus rates, because large cash flows are being poured in.

With regard to the domestic market, some people have said that the Vietnamese securities will restore and continue to rise and exceed the record high in 2018, but this will not be easy, or even be very hard. It should be noted that the US policies and the changes in the international financial markets usually have effect in Vietnam between 6 and 18 months later. Vietnam is now quite deeply integrated in the world market, so it is impossible to say that Vietnam is hardly affected or just a little affected. When the curve of the US government bonds reverses according to statistics of Credit Suisse Bank, it will cause an economic recession about 22 months later, and the curve of these interest rates reversed for the first time in 2018. Therefore, it is very likely we will hardly escape the bad impacts in 2020.

Translated by Nguyễn Gia

Phan Dũng Khánh, Investment Consulting Director Maybank Kim Eng (MBKE)

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