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Currency

Oil, The Petrodollar, And The Next Emerging Market Crisis

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Posted by DollarCollapse.com

on Sunday, 17 June 2018 19:06

Oil prices are up over the past year, which is bad if you’re, say, a developing country that imports a lot of the stuff. But the US dollar (aka the petrodollar) is also up, which compounds the problem because oil is priced in dollars. So Brazil, for instance, finds itself buying an appreciating necessity that’s priced in an appreciating currency. The result is serious trouble for at least some countries in that position. From Saturday’s Wall Street Journal: 

Steep Oil and Strong Dollar Make Toxic Brew for Global Economies

‘Brutal’ rally in dollar-priced crude hammers governments, strains consumers from U.K. to Brazil.

For Americans, rising oil prices are threatening $3-a-gallon gasoline and pushing up prices for plane tickets. In many other parts of the world, today’s crude rally is more painful—sparking protests, gas lines and emergency subsidies to quell unrest.

That is because many consumers outside the U.S. face a double whammy when—like now—the dollar gets stronger at the same time that oil prices rise. While petroleum is produced all over the globe, when it is sold to refiners and other buyers it is almost always priced in dollars.

It is, in the words of Brazilian Finance Minister Eduardo Guardia, “a challenging external scenario.”

After Brazil’s military brought an end to a crippling strike by truck drivers over high fuel prices, Mr. Guardia called the oil rally “brutal” for his country.

Brazil is among the handful of oil-dependent countries in Latin America and Southeast Asia that have turned to costly fuel subsidies. Across swaths of Africa, higher fuel costs and weakening local currencies have hit prices for food and electronics.

Fast-rising crude, on its own, has been pressuring global growth for months. Swiss bank UBS figures that today’s international crude price, around $75 a barrel, would boost global inflation by more than half a percentage point, compared with the $50 barrels the world enjoyed as recently as last year.

Brent crude, the international benchmark, has eased off a recent 3½-year high of around $80, on expectations that the Organization of the Petroleum Exporting Countries will boost output when it meets this week. Before that retreat, oil was up more than 20% this year.

There are global winners, along with losers. The U.S., squeezed over the decades in past oil rallies, is looking pretty comfortable this time. In recent years, America has boosted production significantly, making it much less dependent on imports.

Oil-prices-in-emerging-markets

Fuel prices can be  articularly painful for specific swaths of any economy. This month, Chinese truckers refused to move goods and blocked roads in a handful of cities, protesting higher fuel costs.

Exacerbating the pain in many countries is a strengthening dollar. The WSJ Dollar Index, a measure of the dollar compared with a basket of 16 major currencies, has strengthened 6% since February.

In Europe, dollar strength against the euro has helped make crude today about 30% more expensive than when oil was at a low in February.
For European consumers, gasoline-price shocks are often dampened by the continent’s generally steep taxes on the fuel. That makes the cost of oil a smaller percentage of the overall price of a liter of gas.

This year’s price increase, though, has been so steep that many drivers are feeling the squeeze. Gasoline prices in Britain rose faster in May than in any month on record, according to RAC, a drivers’ lobby group, which called it a “hellish month.” A lower pound against the dollar and higher oil prices were a “toxic combination,” an RAC spokesman said.

Brent crude is still well below the $100-plus a barrel it fetched from 2011 through 2014, and prices probably aren’t high enough to knock the European economy from its recent upward trajectory.

Still, the oil and dollar rally act like a tax, limiting consumers’ discretionary spending. That threatens a pullback in consumption that can eventually hit growth. It can also feed into inflation and pressure central banks to boost borrowing rates. Inflation in Spain jumped to an annualized 2.2% last year from minus 0.2% in 2016, largely due to higher energy prices.

The pain has been greatest in economies where dollar strength has been even more pronounced. In Brazil, gasoline is up 28% and diesel fuel for trucks more than 27% over the past year. The Brazilian real has fallen 11% this year against the dollar.

The two-week strike by Brazilian truckers stranded goods across the country, triggering warnings about possible shortages from grocery stores, hospitals and McDonald’s outlets. To end the walkout, President Michel Temer rolled out the military and promised truckers $3 billion in diesel-fuel subsides and tax cuts.

Brazil’s government has restricted how often fuel suppliers can raise prices, at once a month. As energy prices rose, economists polled by the central bank slashed a full percentage point of growth off Brazil’s forecast output this year, to 2%.

In Indonesia, where the rupiah has fallen to its weakest level against the dollar in more than two years, fuel prices are an election issue. President Joko Widodo has promised not to raise prices of subsidized fuels and electricity through 2019, when he is expected to run for a second term. In April, he required fuel retailers, including foreign firms Royal Dutch Shell PLC and Total SA, to seek government approval before raising prices they charge at the pump.

Jakarta also said it would dramatically increase diesel subsidies. Thailand and Malaysia—where newly elected Prime Minister Mahathir Mohamed made it a campaign pledge—have both ramped up spending to stabilize pump prices.

To sum up the dynamic: Rising oil prices lead to disruptions which force the local government to increase fuel subsidies, which weakens the local currency versus the dollar, which raises oil prices further, which causes disruptions, and so on, until the country turns into Argentina.

So if you’re tracking the “crises move from the periphery to the core” thesis, one good guide is the flow of oil. If a country is a big net importer of oil and both the price of oil and the petrodollar exchange rate are rising, it might be the next domino to fall.



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Currency

USD/CAD Continues to Push Higher Above 1.31 After Dismal Canada Data

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Posted by FXStreet

on Friday, 15 June 2018 06:31

 

  • Manufacturing sales in Canada contract in April.
  • NY Fed Manufacturing Index beats expectations.
  • USD/CAD rises to its highest level in nearly year above 1.31.

 

The USD/CAD pair, which closed the previous day with a 150 pips gain, built on it recent gains at the beginning of the NA session and touched its highest level since late June of 2017 at 1.3170. As of writing, the pair was trading at 1.3165, adding 0.5%, or 65 pips, on the day.

Today's data from Canada showed that the manufacturing sales contracted by 1.3% in April following March's 1.4% expansion and fell short of the market expectation of 0.6%. With the loonie facing a fresh selling wave amid the disappointing figures, the pair gained nearly 50 pips in the last hour.

On the other hand, the monthly report released by the Federal Reserve Bank of New York showed that the general headline index of the Manufacturing Survey improved to 25 in May to beat the experts' estimate of 19. Despite the positive reading, the US Dollar Index remained in its recent range below the 95 mark and was last seen at 94.80, where it was down 0.15% on the day.

Meanwhile, the weak performance of crude oil prices weighs on the commodity-sensitive CAD as well. After closing the first four days of the week with modest gains, the barrel of WTI is looking to end the week on a negative note as it loses 0.5% at the moment.

Technical outlook

dddfd

 

Click chart for larger image

The pair could face the first technical resistance at 1.3200 (psychological level). A decisive rise above that level could open the door for further gains toward 1.3260 (Jun. 27, 2017, high) and 1.3340 (Jun. 21, 2017, high). On the downside, supports are located at 1.3115 (daily low), 1.3000 (psychological level) and 1.2950 (Jun. 14 low). 



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Currency

A Spiking Dollar = Emerging Market Chaos, Part 2: The Story In Four Charts

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Posted by John Rubino - Dollarcollapse.com

on Monday, 04 June 2018 07:59

For most of the past few years, emerging market stocks and bonds were among the favorite investments of everyone from hedge funds to pension funds to retirees. 

Emerging-market-stocks-June-18Now, not so much.

The next two charts (courtesy of Saturday’s Wall Street Journal) show the huge recent run ending in January, to be replaced by a full-on rout. 

emerging market bonds

What happened? Well, it turns out that a big part of the apparent success of economies like Argentina and Indonesia came from their ability to borrow in international markets – frequently in US dollars – and use the resulting cash to build roads, bridges, airports, and soccer stadiums — that is, things that imply visible progress. Visitors came, saw all the “modernization,” went home impressed and hit “buy.”

But then US interest rates started to rise and the dollar spiked off of its recent lows. Treasury bonds suddenly started to look attractive relative to EM securities, while all those EM dollar debts began to look onerous rather than wondrous. The hot money decided to leave, putting downward pressure on EM currencies (which makes dollar-denominated debt even harder to pay off) and forcing EM central banks to tighten monetary policy and raise rates. 

emerging market currencies

emerging market interest rates

The result? Contraction where once there was limitless growth, and instability where there was rock-solid continuity. Emerging markets have been here before, of course, and history teaches that it will get worse before it gets better.

History also teaches that trouble on the periphery frequently moves towards the center to threaten developed world institutions that were buyers of all that EM dollar debt. Hedge funds, pension funds, bond funds, global stock funds, and major-bank prop trading desks, are all on the hook for Brazilian, Argentine, and Mexican paper, which means – history again – that US taxpayers are actually the ones on the hook. 

So watch for apocalyptic headlines as the 1% softens the rest of us up for yet another transfer of wealth from middle to top.



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Currency

King Dollar's safe-haven surge has only just begun

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Posted by Robert Zurrer

on Friday, 01 June 2018 08:42

kingdRise in index has a lot of myriad causes

The US Dollar Index's 4.5 per cent rise since mid-April has myriad causes. One, the Italian election annihilated the political center and produced the worst possible coalition scenario of the far left (Five Star) and the far right (Northern League), two populist, anti-euro parties that won 54 per cent of the vote. Italy has a de facto bankrupt banking system, a 130 per cent public debt/GDP ratio, vast regional inequalities (Milan and Calabria are different planets, as are Lombardia and Veneto from Sardinia) a toxic Mafia presence and a fiscal nightmare. Now its politicians want to renege on the fiscal/pension reforms imposed by Berlin and Brussels in 2011. This is the nightmare scenario for the euro and the euro is 57 per cent of the US Dollar Index.

Two, the Italian-German Bund debt spread has surged, as has Italy's risk of sovereign default. The euro's fall to its SNB's floor against the Swiss franc at 1.20 is an ominous message of systemic risk. There is no way the ECB can begin quantitative tightening in September. A premature end to Dr Draghi's asset purchase programme could literally trigger a Greek-style sovereign debt crisis - only on a far bigger scale. Italy has the third-largest bond market in the world. If Italy goes bad, Planet Forex will script the requiem for the euro and the dream born in the Treaty of Rome. The safe-haven bid in the US dollar has only just begun.

Three, the US-China deal averts an immediate trade war, though it is mathematically impossible for the US trade deficit to fall $200 billion on higher Chinese imports of US energy and agribusiness products. Chinese exports to the US will have to fall, a real risk to growth in Japan, South Korea, Taiwan, Singapore and Malaysia. Net-net, this means lower Asian currencies against the US dollar.

Four, the correlation coefficient between the greenback and Uncle Sam debt yield has risen in the past month with a vengeance. Japanese inflation data shows Governor Kuroda's 2 per cent inflation target is a central banker's midsummer nights fantasy. This means there is no chance that the Bank of Japan will exit its zero bond yield policy in 2018. Shinzo Abe is mired in a political scandal and yet another LDP factional night of the long knives. The path to ¥110, a target I outlined a month ago, was inevitable given US Treasury-JGB yield spreads, Fed-BoJ monetary tightening timetables and the political time bomb that now haunts Abenomics.

Five, the risk of emerging markets contagion is all too real as I watch the Turkish lira and the Argentine peso meltdown. There is $220 billion in external debt issued by non-financial Turkish corporates. There is $14 trillion of debt outside the US held by non-American banks. Deutsche Bank has $25 billion in equity capital and $1.7 trillion in liabilities. Is there a Lehman scale banking time bomb in Europe? Is the Pope Catholic? The world is on the precipice of a major funding and debt crisis. The US dollar is the world's natural safe-haven currency as the US banking system is the only true credible deposit insurance scheme for savings when the lights go out in Europe.

Six, I was stunned to see the Canadian dollar trade as low as 1.2980 (Nafta?) even though Brent crude surged to $80 a barrel. When petrocurrencies fall while Brent hits 4-year highs, I get nervous. I remember the bitter memories of 2007 when I seriously thought that we were doomed to relive the Great Depression. Every post-war US recession has been preceded by a surge price of crude oil. Will the recession of 2019 be any different?

Seven, financial markets now ignore the US trade and budget deficits and focus on relative US economic outperformance versus Europe. This is the reason the Fed Funds futures contract implies three more rate hikes in 2018 and two rate hikes in 2019. King Dollar is back from its post-election Trumpian netherworld and King Dollar will now kick (rhymes with) glass My next target? ?1.08.

Eight, The Turkish lira has plunged to 4.80 lira against the US dollar despite central bank rate hike that is anathema to Erdogan. The AKP's top economics honcho Mehmet Simsek will fly to London to reassure terrified investors. Too little, too late; a financial crisis and deep recession is now inevitable even as Erdogan goes to the polls to seek reelection on June 24. The Ottoman Empire died amid a tsunami of foreign debt. A deadly endgame awaits the world on the Bosphorus.

The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.



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Currency

A Spiking Dollar = Emerging Market Chaos

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Posted by John Rubino - Dollarcollapse.com

on Tuesday, 29 May 2018 06:45

With the US dollar gaining strength across the currency market and Treasury yields coming off significantly, it's easy to conclude the underlining the investor mood of risk aversion is pushing those looking for safety into the US Dollar - R Zurrer for Money Talks

The dollar collapse thesis – which ends with all fiat currencies achieving their intrinsic value of zero — doesn’t preclude some thrills and chills along the way, in which some currencies fall faster than others and wreak havoc on various parts of the global economy.

This might be one of those times, as instability in the Middle East, Europe, and parts of Latin America sends worried capital pouring into the US, pushing the dollar up from its recent lows:

US-dollar-May-18

This may not look like much of a spike in the historical scheme of things, but it actually is, because a handful of developing countries have, for reasons that defy both history and common sense, decided to borrow trillions of US dollars. Now, with the dollar appreciating versus their local currencies, they’re having trouble making the suddenly-much-more-expensive interest payments.

Why would a country whose money is the peso or the real conclude that it’s a good idea to bet that their currency will appreciate versus those of other countries for decades to come? Who knows? But they’ve done it, and big banks around the world have enabled them. 

Here’s a chart from Bloomberg showing that the foreign currency debt of emerging market countries has nearly tripled since 2008, to more than $8 trillion (most of which is denominated in dollars, with some euros tossed in for diversification), which they now have to pay back regardless of where the dollar goes relative to the currency in which their governments collect taxes or their corporations make sales. 

image.png

And here’s an excerpt from the Bloomberg article that included the above chart:

Emerging-Market Stress Just Begun as Record Debt Wall Looms

Emerging-market companies and governments straining to deal with the rising cost of borrowing in dollars face increasing pressure as a record slew of bonds come due.

Some $249 billion needs to be repaid or refinanced through next year, according to data compiled by Bloomberg. That’s a legacy of a decade-long debt binge during which emerging markets more than doubled their borrowing in dollars, ignoring the many lessons of history from the 1980s Latin American debt crisis, the 1990s Asian financial crisis and the 2000s Argentine default.

Even since the 2013 taper tantrum, the group’s dollar debt has climbed in excess of $1 trillion — more than the combined size of the Mexican and Thai economies, Institute of International Finance data show.

“We look to be in for a pretty rough patch near term,” says Sonja Gibbs, senior director for capital markets in Washington at the IIF, an association of the world’s biggest banks. “The sharper the rise in the dollar and rates, the greater the near-term contagion risk.” Rising U.S. rates will have a knock-on effect even in local debt markets, she said.

 

Emerging-market-debt-maturities

China has far and away the most dollar debt coming due through next year among emerging markets. Though much of the debt is also owned by Chinese investors, strains have become clear in recent weeks, with some companies unable to issue at their preferred amounts and maturities, and others, unusually, marketing floating-rate notes.

Despite having defaulted in the early 2000s, Argentina has issued so much dollar debt that it ranks No. 4 on the list — a testament in part to the impact that unprecedented U.S., European and Japanese monetary stimulus had in spurring a global hunt for yield since the 2007-09 financial crisis.

Turkey has the largest foreign debt load relative to gross domestic product, and perhaps not coincidentally has one of the worst-performing currencies against the dollar this year, down about 21 percent. Only Argentina’s peso has done worse among 24 emerging nations tracked by Bloomberg — another country that ranks high on the debt metric.

The rapid build-up in debt over the past decade has alarmed some — including Harvard economist Carmen Reinhart, who made headlines saying emerging markets are worse off today than during the 2008 crisis and 2013 taper tantrum.

“This is not gloom-and-doom, but there are a lot of internal and external vulnerabilities now that were not there during the taper tantrum,” Gibbs said last week.

Why should Americans care if Turkey or Argentina defaults on their bonds? Because institutions all over the world bought those bonds in more innocent times (see Here’s When Everyone Should Have Known That Argentina Would Implode), and have built share prices, pension payouts and arbitrage strategies around them. If the bonds blow up, so do a lot of banks, hedge funds and pension funds. 

And if the resulting global anxiety sends even more flight capital into the dollar – pushing its exchange rate up even further and making emerging market debts even harder to manage – we might be looking at a negative feedback look with systemic implications.



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