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The DXY & A Slowing Global Economy - YouTube
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(upbeat music)
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- [Arno] Just quickly following up
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on a question from Hiroshi,
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who asks us about the US dollar,
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asking what would likely
happen to the US dollar
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if the US economy doesn't
recover as fast as expected,
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and unemployment remains
very high for longer?
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So great question Hiroshi,
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and one that we can unpack
a little bit more detail.
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So whenever we look at the US dollar,
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we need to first understand its role
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from a global perspective, right?
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So it's the world's reserve currency,
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over 40% of the world's data's
dollar denominated over 60%
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of all FX reserves is sitting in dollars.
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So whenever we have a global
slowdown and limitations
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on international trade from slowdowns,
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or maybe global pandemics for example,
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we always see demand for the US dollar,
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because we have companies
and governments and investors
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all scrambling to get
dollars to service data
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and perform regular operational functions.
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So apart from the US economy,
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we always need to first
consider what is going on
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in the rest of the world.
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So if the world is slowing
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but the US economy is slowing slower,
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then than the rest of the world,
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then of course, that's going
to be a good environment
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for the US dollar.
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So before looking at the US itself,
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we need to consider it through the lens
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of the rest of the world.
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So if we start to see
the rest of the world
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coming out of this recovery
faster than the US dollar,
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or than the US rather,
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then obviously that'll start
to weigh on the US dollar.
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Now, when considering something
like international trade,
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we'll also need to consider
the Feds recent actions
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in line with that.
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So the Fed has tried to flood the market
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with as many dollars as they can,
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by opening up additional swap lines
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of countries starting unlimited QE,
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all with the aim of providing
enough dollar liquidity.
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Now a lot of that was caused
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by obviously restricted
international trade
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from the pandemic.
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So once international
trade starts to pick up,
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that should see some
pressure on the US dollar
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unless the Fed starts to then scale back
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on some of those measures
they've put in place.
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So that's a very important
thing we need to watch.
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The more dollars become freely available,
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obviously, the less demand they'll be
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and that can see some lower
exchange rate for the dollar.
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So international trade in
line with what the Fed does
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will be an important consideration.
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And then if we turn to
the US economy itself,
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there's a couple of things we can look to
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and keep in mind. Now if
we just quickly take a look
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at this Excel spreadsheet,
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this is basically just
a plain economic tracker
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for the US economy that is divided
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into all of the major
segments of the economy,
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and tries to track it on a rolling basis.
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Now, the interesting thing
that you'll notice here
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is that the dollar is this one over here,
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the dollar index has become
greener and greener and greener
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as the entire economy has become more red
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across the board, right?
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Now, the reason for that
is because the US dollar
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usually appreciates in an environment
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where both inflation and growth
is slowing at the same time.
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So as the economy turns down,
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investors will start to
rotate into things like cash,
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but again, if you look at
something like bond yields,
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for example, bond yields have
been starting to move lower
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across the board in the
anticipation of lower interest rates
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for a while now.
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Now normally, that should be negative
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for something like the US dollar,
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but we still saw the dollar climb,
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and the reason for that was
because the rest of the world
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was slowing way before the US
economy was starting to slow.
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So the downturn in the US we can see
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ended at the end of 2018,
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here we can clearly see just
by looking at red and green,
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where the economy started
to show signs of stress.
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And even though it was starting to slow
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from the end of 2018,
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the rest of the world started
to slow way before that.
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So they started to slow
at the end of 2017,
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and the beginning of 2018.
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So even though the US economy was slowing,
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it was slowing slower than
the rest of the world,
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so to speak.
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So that was basically a
choice between a bad currency
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and a worse currency in terms
of the US dollar strength.
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So to your question,
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what will happen to the dollar,
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if the economy recovers?
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Recovery takes longer
and we see unemployment,
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you know, stay bad for longer.
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Now as long as the rest of
the world stays low as well,
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the US dollar should actually gain
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from worse than expected data
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or the worse the data gets, right?
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So if we see a faster
recovery outside the US,
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then the US dollar is
in for some downside.
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Now the one area that
will be very important
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for the overall health of the US
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and where the market will think,
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what the market will think
about growth and inflation
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going forward will of
course be the labor market,
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which is your question as well.
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So right now, there are
lots of expectations.
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Let me just quickly turn that squawk down.
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So right now, there's
lots of expectations,
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that a lot of the bad data
has already been priced
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in for the labor market,
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and a lot of the lost jobs will come back
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once the lockdowns are ease.
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Now that is one of the reasons
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why we've seen that downtrend
in the jobless claims
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get a lot of attention
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because the market is obviously
forward-looking in nature.
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But when you can base something
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like the slowing jobless claims numbers
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to something like the continued claims,
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and you can see that
it's actually showing you
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a different story,
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so yes, the amount of new jobless claims
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has been coming down,
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as expected, but the amount
of continued jobless claims
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are rising with the latest data
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still currently sitting at 23 million.
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So unless this number
starts to slow drastically,
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it'll have far reaching negative effects
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still on the US economy to come.
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So no work means no pay,
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no pay means no paying of bills,
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no spending the economy,
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no buying of houses.
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And that is why in line of employment data
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it's also gonna be very
important going forward
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to look at something like
the housing market, right?
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So the housing market
hasn't shown as bad science
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as the rest of the economy,
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but that still needs to trans...
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That transmission effects still
needs to have ripple effects
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into other places of the
economy like the housing market.
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So that'll be another important
factor for us to watch.
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Now, the effect that all of
this will have on the US dollar,
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again, will depend on how the economy
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is doing compared to
the rest of the world.
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Firstly, that's always
gonna be the first one.
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Secondly, whether the Fed keeps up
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With those liquidity injections,
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especially after the demand
for dollar starts to go down.
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And then thirdly,
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whether the economy can
recover meaningfully,
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or whether it will be more
of a protracted recovery
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like you see it.
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So the US is still the biggest
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and most important economy in the world.
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So if they struggle to recover,
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that should also be put some pressure
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on the rest of the world in
terms of recovery as well.
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So it will be important
for us to not only gauge it
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from the US economy perspective,
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but also from the global perspective.
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So when it comes to the
upcoming US economic data points
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as long as the dollar is acting
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and trading like a safe haven,
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expect the worsening data
to be more supportive
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for the US dollar,
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and alongside this,
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also expect that to be
more supportive of things
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like gold and US treasuries,
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and expect the recovering
data to pressure the US dollar
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alongside again, things
like gold and US treasuries.
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So Hiroshi, I hope that helps,
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any other questions, don't
hesitate to let us know.
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