An SEC-registered Investment Advisor
This Slide Deck is to Accompany
Parts 1 and Parts 2 of the 5 Part Series
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Dollar
BULLS vs BEARS
(nobody wins)
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What is a ‘rising’ ‘dollar’?
Nothing Bullish
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Main instruments to provide foreign currency on a repayable basis are auctions. The Bank of Russia holds these operations as FX repo
auctions and auctions to provide FX loans secured by a pledge of claims on FX loans.
The Bank of Russia also determines the aggregate debt ceiling of credit institutions on FX repos and FX loans secured by a pledge of
claims on FX loans. Currently, the ceiling is set at $50 billion in US dollars but it can be increased, if necessary.
The Bank of Russia links the minimum interest rates on auction-based operations to provide foreign currency to LIBOR3 in respective
currencies for comparable terms. The Bank of Russia determines market rate spreads for each specific instrument (Interest rates on
the Bank of Russia FX operations) taking account of the situation in the domestic FX market. Meanwhile, the interest rate at which
banks receive funds is determined by the auction results.
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The way the Brazilian derivatives market works is different than what is
implied in mainstream commentary. Without getting too far into those
weeds, the Brazilian monetary authorities realized, from past experience
with currency depreciation-type emergencies, that they did not
necessarily need to offer dollars. Instead, the Brazilian treasury sells,
continuously, domestic public debt indexed to US dollar rates.
The Banco’s “swaps”, then, act only on implied future dollar rates,
increasing the cupom cambial (the onshore dollar rate implied by currency
futures and spreads with dollar rates). In other words, since the central
bank “swap” reduces the futures price of dollars in relative comparison to
the spot price, there is a greater incentive for banks (both Brazilian and
foreign) to borrow US dollars on foreign markets and import them to take
advantage of the cupom cambial spread. The swap isn’t really a swap in
the conventional sense since the central bank is only swapping dollar
indexed securities – deliverable in reals. In short, it is the old central bank
axiom of getting the “market” to do your dirty work for you.
Alhambra Research, October 21, 2013
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Evolving Chinese Response
Tells Us Quite A Lot About The Intractable Nature Of The ‘Dollar’ Problem
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Overall, the financial situation in our country is good.
However, at present and for a period in the future,
China’s financial sector is still in a period of high risk-
prone period [sic]. Under the pressure of multiple factors
at home and abroad…
Latent risks that are, “hidden, complex, sudden,
contagious and hazardous.”
PBOC Governor Zhou Xiaochuan, November 4, 2017
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“
The outbreak of the current crisis and its spillover in the world have
confronted us with a long-existing but still unanswered question, i.e.,
what kind of international reserve currency do we need to secure global
financial stability and facilitate world economic growth, which was one of
the purposes for establishing the IMF?
The acceptance of credit-based national currencies as major
international reserve currencies, as is the case in the current system, is a
rare special case in history.
The desirable goal of reforming the international monetary system,
therefore, is to create an international reserve currency that is
disconnected from individual nations and is able to remain stable in the
long run, thus removing the inherent deficiencies caused by using
credit-based national currencies.
PBOC Governor Zhou Xiaochuan, March 23, 2009
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Global Economic Costs
Lost One Decade, All Signs Point To A Second
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Nothing Goes In A Straight Line
What Counts As ‘Loose’ In 2017 Is Nothing More Than Relatively Less ‘Tight’
In Comparison To 2014-16
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Dollar
BULLS vs BEARS
(nobody wins)
concluded
