Societe Generale’s Albert Edwards says that market is overlooking a major problem: liquidity.
The rallying US dollar is crushing other currencies in more ways than one, Edwards wrote in a note to clients on Friday.
Edwards highlighted that global foreign exchange reserves are drying up because of the strong dollar.
Edwards writes that in periods of weakness, central banks all over the world printed cash to buy up US dollars. That keeps their currencies weak and is a type of quantitative easing, he wrote, which boosts exports and keeps economies competitive.
But as the dollar rallies, “FX intervention rapidly dries up and can even reverse, exerting a massive monetary tightening on emerging economies and ultimately the entire over-inflated global financial complex.“
So with focus on the European Central Bank’s plan to pump up to €1 trillion in liquidity through QE, Edwards says investors are ignoring the fact that reserves are drying up everywhere:
The bottom line is that in a world of over-inflated asset values, the strength of the dollar is resulting is a rapid tightening of global liquidity as emerging economies (and indeed the Swiss) stop printing money to buy the US dollar. This should be seen for what it is: a clear tightening of global liquidity. Traditionally these periods of dollar strength are highly disruptive to emerging markets and often end in the weakest links blowing up the entire EM and commodity complex and sometimes much else besides! Investors ignore this at their peril.”
The dollar’s rally this year has been relentless.
And in trading on Friday, the dollar index rallied to the highest in at least 11 years after the February jobs report beat expectations.
Here’s how the strong dollar is pressuring cash reserves all over the world: