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Currency Wars - March 2016 War Room

HiddenLevers March War Room covering brexit, Yuan Devaluation, and other threats to USD stability

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Currency Wars - March 2016 War Room

  1. 1. Currency Wars 01 April 2016 War Room
  2. 2. HiddenLevers War Room Open Q + A Macro Coaching Archived webinars CE Credit Idea Generation Presentation deck AccountabilityScenario Updates
  3. 3. Market Update US Dollar Analysis Scenario: Currency Wars Currency Wars NEW
  4. 4. HiddenLevers MARKET UPDATE
  5. 5. Obesity lifting healthcare spending over HousingCUT CUT CUT CUT Market Update sources: HiddenLevers, World Economic Forum, Marketwatch, WSJ 1 2 Oil Majors cutting new exploration 3 Brightest no longer US locals
  6. 6. Fintech Update sources: HiddenLevers, Investment News, FINRA, KPMG Schwab ends boondoggle with Salesforce FINRA report cites Robo shortcomings 2015 13.8b USD poured into Fintech (2x 2015) (6x 2011)
  7. 7. HiddenLevers US DOLLAR ANALYSIS
  8. 8. USD Analysis: Long Term Trends sources: HiddenLevers, TradingEconomics • Relative moves in interest rates matter – the Fed’s moves relative to others • Dollar peaks have come at both the middle and end of stock market cycles • Dollar has short term bounces during market fears, but doesn’t last Gold Standard Era Fed Hikes rates to fight inflation US Budget Balanced Fed cuts rates from 6.5% to 1% No lasting rally on fear trade
  9. 9. USD Analysis: Recent Trends USD vs 12M Yield: divergence sources: HiddenLevers Phase 1 USD up post QE No risk premium Phase 2 USD Flat Too much Oil Phase 3 USD/OIL inversion returns USD vs Oil: back to normal
  11. 11. Fed: Policy Impact on USD sources: HiddenLevers, Bloomberg, CNN QE 1 QE 2 QE3 Taper Rate Hike Rumors Rate Hike • QE 1 + 2 pushed USD down • QE3 could only keep USD flat • End of taper allowed USD to rocket up • Buy rumor, sell news: rate hike arrival  USD mild reversal
  12. 12. Fed: Recent Decision on 4 Hikes  2 hikes sources: HiddenLevers, CNN, Quartz Negative All criteria met for hike and no raise = Fed losing credibility Fed out of ammo – cant really lower rates or do more QE USD down in Feb = Market knew before Fed said it out loud Positive Fed woke up to deflation as bigger threat to US economy, not inflation Fed realized it can’t raise rates with rest of world lowering into negative territory Inflation flat Labor force uptick
  13. 13. GOOD: Fed halts hikes source: HiddenLevers, CNN, Financial Times Fed dovishness continues in a negative rates world Return of usual S+P / USD inverse correlation Fed joins central banks insanity with easing Commodities sail up
  14. 14. HiddenLevers CURRENCY WARS: BREXIT
  15. 15. Brexit: Europe impact on UK sources: HiddenLevers, BBC,; Economist EUR 27 May 2015 Brexit referendum announced GBP falls 13% on Brexit fears 23 June 2016 Brexit vote Polls evenly split among Brits
  16. 16. Brexit: Pound’s Impact on USD sources: HiddenLevers, Bespoke Investment Group GBP and USD move inversely, but huge divergence began in mid-2014 with giant dollar rally USD -2% GBP -9% long term short term GBP + USD move inversely, but huge divergence began in mid-2014 with giant USD rally
  17. 17. BAD: Brexit Britain exits the Europe, creating GBP flight source: HiddenLevers, Citi Research Downside impact likely regional UK departure opens the door for others Money leaving Pound chooses USD over EUR
  19. 19. China: Slowdown Update sources: HiddenLevers, WSJ, BBC, Chinese Bureau of Statistics slowest econ growth in decades Bad loans exceed 2008 US subprime Mass domestic outflows to US/UK/AUS real estate + equities $800b Jan stimulus NO increase in sales or production
  20. 20. China: Yuan Devaluation Dilemma sources: HiddenLevers, WSJ, China Reserves High mark = 3.3 Trillion USD 2015: 513b spent defending Yuan Young govt never experienced floating Yuan Defend - Bolster domestic consumers - Save face abroad Devalue - Bolster exporter companies - Conserve USD reserves - Doesn’t stem capital outflows Should China defend Yuan or devalue?
  21. 21. UGLY: China Yuan Crisis 97 Asian crisis -10% S+P -50% currencies source: HiddenLevers Fierce USD rally kills commodities Amateur govt mismanages Yuan deleveraging China 2016 2x Asia in 1997 China exhausts USD reserves
  22. 22. Scenario: Currency Wars Good: Fed stops hiking Bad: Brexit Ugly: Yuan Crisis USD Index +11% S&P -15% USD Index +4% S&P -4% USD Index -10% Fed continues the easy money policy on low inflation and foreign woes, stoking equities higher. The UK votes to leave the EU, with negative impacts for the Pound, Euro, and regional stock markets. China is forced to devalue its currency, leading to a new Asian currency crisis, with worldwide ripple effects. S&P +11%
  23. 23. Currency Wars – Take Aways China devaluation big risk, Brexit small risk Renewed Fed dovishness pumps market but for how long? USD huge impact on commodities, less so on S+P Fed stuck here on rates.