Assetrally - Usd sinking - the eye of the storm

* Global tradeimbalances are expanding at an ever increasing pace.
As these imbalances continue to grow, the global setbackrisks are as well.
I believe we are currently in the eye of the storm.


These tensions should not be able to continue for any stretched period of time.
Why not then?

1) As the world is competing ever more fiercely for exports, the realisation that fixed or semifixed currencies are creating big domestic as well as international risks will become evident.
The Chinese argument that a stronger Renminbi will risk their economy is similar to accept an even greater sensitivity in the future as their surpluses accumulate. "When in trouble, double". Not the way to go.

2) Global fierce competition for exports will lead to trade tensions, which will lead to trade restrictions and tariffs. This will reduce global trade and hence, global GDP. The risk for armed conflicts will increase drastically. Especially as higher soft commodity prices will correlate with the weaker Usd. Noone wants risking major armed conflicts at this stage.

3) As the US currency depreciates, the risk for a suddenloss of confidence in the US currency increases, especially as the US deficits and debt continues to build and yields are close to nothing.
Should this happen, any country sitting with huge currency reserves - especially the fixed or semifixed currency regimes, China being one of them, would suffer massively. The extent of Chinese Fx reserves would mean the government would have to raise taxes or debt to compensate for the FX losses. Essentially, China would fall apart, given the extent of leverage, misallocations of investments, bank exposures to realestate markets and corporate projects and corruption. And if China falls,,,,,,, fill in the blanks please. US doesnt want it, and neither does China.


Better then to try and control this global deleveraging and rebalancing process by making a G20 agreement. Unfortunately I believe the probabaility for that is quite low since politicians only have one strategy - the ruin strategy; "when in trouble double".
Hopefully, riskappetite will adjust downwards as trade tensions increase on the back of a G20 "no deal".

Short term, I believe the market has overpriced the US QE and we will see a moderation towards QE from Bernanke tommorrow, as positioning for the G20 meeting begins. If the US softened their QE easing approach, probabilities would at least increase that China would agree to let the Renminbi appreciate at a slightly faster pace. Although a deal would still be slim, at least both parties are probabaly willing to try making one.


* Short term conclusions, outlook for the Usd, (and currently high correlated commodities);
With US QE pricing overdone, IMM positioning ditto, my expectation of increased riskaversion no matter the outcome of the G20 (G20 deal = drastically lower Eur/Usd, no deal would = further trade tensions - reduced risk appetite - lower Eur/Usd. Also, long term US interest rates would rise drastically on a deal due to China buying less US bonds as their FX reserves would grow at a slower pace. Long term US interestrates would rise much less so on a no deal. In any case, higher implied asset volatilites are to be expected.



* We are currently in the eye of the storm - enjoy it while it lasts
Have your stormgear handy.
This is the time to prepare for what's to come, while making as much as possible out of the current environment. This period should be treasured since commonsense will dictate that massive reallocations could be around the corner in order to rebalance the world economy and deleverage it. It is important to remember that rebalancing of the world economy will mean deleveraging it. That process will be very harsh indeed.




* New positions and position changes
- Stopped out of my short Eur/Usd position
- Stopped out of my short Gbp/Usd position
- Took profit on my short Eur/Jpy position
- Stopped out of my short ETF equity index positions and reversed

I will go short Eur/Usd, Eur/Jpy and Gbp/Usd pre the Ben Bernanke speech tommorrow, expecting a moderation of the QE approach in line with pre G20 positioning. I will use options in order to get cost efficient leverage and costcontrol. On top of it I expect implied volatilities to increase from here.




As usual, good luck





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