De-Dollarisation might take a pause...
DE-DOLLARISATION – the hip new buzz phrase – may actually play out this time, for a while, writes Gary Tanashian in his Notes from the Rabbit Hole.
The multitude of analysts that have been waiting for the "death of the Dollar" (DoD) for at least a couple of decades now have a new jingle.
"DeDollarisation" by global entities trading in goods and services will finally kill old Uncle Buck, or if you like, remove "King Dollar" from his throne.
What could be the catalysts for DeDollarisation? Well, here is non-exhaustive list...
- Increasing tensions between the West, and the US in particular, with global resources and commodity rich countries that may wish to free their trade from the tyranny of the all mighty Dollar. This is likely exacerbated by the degree of US involvement in Ukraine as Russia makes its mark in Opec+;
- China, obviously a developing behemoth, has its own issue with Taiwan, as relates to US interests;
- The development of global economic zones to the point where they have simply outgrown the dependency on a late stage economic empire that is in a state of slow decay at best, and acrimonious pre-civil war at worst;
- Said economic empire's own political in-fighting about the debt ceiling, as this time the periodic squabbling about raising the bloated debt ceiling once again appears more serious. The inflation problem created in 2020 by the Fed's printing press is no doubt increasing the seriousness of the debt debate this time.
What does it all mean? Well, we have been on a disinflationary theme since H2 2022 and the forward view has favored a deflation scare before the next outbreak of inflationary pressure.
That would theoretically drive the herds into the liquidity of the US Dollar (reserve currency). In short, a resumption of the bear market in stocks would see a jerk by the herds into the US Dollar and its running mate, the Gold/Silver ratio (as gold is monetary liquidity and silver is more of a commodity/precious metals spec). Together they are the 2 riders of the liquidity Apocalypse.
The details we are watching and the strategies that would be implemented are beyond the scope of this public article, but what is not beyond the scope is a technical view of the 2 riders. If they bull, the expected course for the markets (inflation > disinflation > deflation scare) since H2 2022 remains intact. If they break down, it's going to get really interesting (and noisy, as the "DoD!" callers finally feel vindicated and let us all know about it).
As for the global markets, let's just say that with the Fed's hands tied (keeping it from using its usual liquidity tools) as it fights the inflationary Frankenstein it created, a more globally focused inflation trade could manifest if the US Dollar were to break down and act as the counter-party it so often is.
Here is the daily chart view of global stocks (ex-US) and the inverse of USD. Pretty tight inverse correlation, eh?
Also look at the daily Gold/Silver ratio (GSR) before reviewing USD on short through long-term time frames. Gold has trailed silver, indicating – along with several other indicators we keep tabs on – that global liquidity is still okay at this time. If the GSR were to break down below the December low a whole new kettle of fish (and the liquidity they swim in) would be indicated, and it likely would not be bearish, especially for global stock and commodity markets and yes, the precious metals as well. But if the GSR bottoms here and turns up, we're still on existing plans.
Moving to the star of our show, Uncle Buck is at a support level that does not look too impressive on the daily chart. But it does have the potential to make a double bottom.
The weekly chart provides a view of more impressive support at the 2020 topping cluster. It also shows a would-be (not activated) Head & Shoulders topping pattern that you, I and everybody else sees. If what we all see actually follows through and breaks down, the macro will change and our theme will change with it. Until then, USD is at support and the deDollarisation story continues to simmer, but not boil over.
The monthly chart is where it really gets interesting because this is the view that allows for a significant drop in USD while retaining the long-term bull market status that has been in place since 2008.
In other words, a breakdown from what shows even more solid (long-term) support in the 101 area could spring a whole lot of global liquidity, embolden the DoD and then later kill the whole party as USD finds support well lower in its bull market.
Again, this is not the favored plan to this point. But as you can see, the macro is at a pivot point here and now, from the perspective of the global reserve currency and its fellow would-be liquidity destroyer, the Gold/Silver ratio.