With perhaps the cyclical low in bond yields and potentially even the secular low, now behind us, according to market strategist Julian Brigden, Trump’s plans for economic nationalism means that the dollar advance will start to become very toxic for the rest of the world later next year.
Global macro specialist and advisor to hedge funds, Julian Brigden of Macro Intelligence 2 Partners said, when he appeared on Real Vision TV, that the dollar’s current gains amid higher rates is all perfectly normal.
He suggests that the ‘risk on’ phase of the dollar’s rise still has further to go, but as Trump’s policies come on stream, combined with a shortage of dollars in the international system, the repercussions could start to become much more severe.
Dollar Status as Reserve Currency Under Threat
“When the second wave comes in terms of the stimulus package from Trump and in particular the corporate tax repatriation, the sucking sound from the rest of the world, as the dollars come home, will mark the ‘risk off’ phase and it’s possible that you push the dollar so far that its status ultimately as the reserve currency will end up being challenged,” Brigden said.
Brigden’s analysis is familiar to Real Vision viewers, that Central Banks overcooked the goose by over reacting to the stimulative collapse in oil prices, resulting in a surge in growth and inflation, with rising bond yields benefitting the dollar.
While economic data is supportive, the ‘risk on’ dollar environment is not so toxic, but as the forces peak in Q1 and economic data starts to turn, things will start to get a bit messier and the dollar should pause or correct. When the corporate tax repatriation occurs later next year, however, it will be positive for the dollar, but very toxic for the rest of the world, he said.
Dollar Price is Not the Concern — Dollar Supply is the Worry
What’s really worrying Brigden is not the price of the dollar, but the supply, particularly against the backdrop of the narrowing current account deficit. Also the fact that regulatory changes mean dollars aren’t filtering their way back into the international system as quickly they would have previously.
The key, Brigden said, is the shale revolution because even with that industry in a downturn, the US is now spending 65% less on energy imports than at the cycle high.
“At the core of our reserve system, we have this massive structural supply problem and we are now contemplating legislation that will suck back a pool of dollars which is sitting overseas in corporate bank accounts but being used to fund offshore dollar liabilities,” Brigden said.
“The analysis we have told our clients is that because of material changes to the plumbing system that recycles dollars into the rest of world, in particular Basel 3 and changes to money market rules, the re-hypothecation process doesn’t work as smoothly.”
You can see the full presentation by Julian Brigden, including the timing on his expected moves for the dollar and fixed income markets, as well as the global impact, by taking a free 7-day trial to Real Vision.