Damien Cluesix’s Global Tactical Asset Allocation currency piece, published on Zero Hedge today, included an interesting correlation relating to the impact of dollar liquidity in global credit markets.
On page 9 of the piece, there is a chart presenting outstanding foreign financial CP against an inverted Dollar Index. I have re-generated my own version of the chart below, using the Fed’s graphical format and graph generator.
There is a striking inverse correlation to commercial paper outstanding in foreign financials and the dollar’s trade-weighted value. The sharp contraction of CP outstanding during fall 2008’s liquidity crunch correlated with a spike in the USD, and the correlation continued during the bounce back of credit markets since spring 2009, with the dollar tanking in the same timeframe.
The implication is that the Federal Reserve’s dollar-debasing actions, through various stimuli, quantitative easing, and liquidity swaps, have extended dollar liquidity globally and have unfrozen credit access to foreign firms, with a particularly striking correlation with foreign financials’ CP outstanding.
The significance of the USD to global financial markets and economies is very striking and indicates a global macro environment almost entirely dependent on dollar liquidity and USD fluctuations (and consequently, dependent on the actions of Ben Bernanke). As Cluesix states:
Foreign financial companies have continued their trend toward heavier borrowing of USD on the US commercial paper market. Could they get squeezed as in 2008?
And do not forget, has we said in September that we have seen a proliferation of debt issued in USD (Germany, Spain, etc) the rationale being that not only do we have to pay lower interest but as the USD is doomed to fall it will cost less to pay the principal. Well they might have a nasty surprise.
Should the dollar get squeezed, as I see happening, foreign banks should lose vital short-term credit access. The politicization of financials globally and the reflexivity pervasive in the global financial and economic systems make this an alarming implication. Another global liquidity crisis, though probably smaller in magnitude and shorter in duration thanks to trigger-happy reactionary policy globally from central banks, could be at hand, should the dollar gain strength in coming months.
The GTAA piece is viewable below. It is prudent to mention that Cluesix is bullish USD and bearish JPY EUR GBP, trade ideas all of which are shared by me.