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antk
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Posts: 2
Joined: November 19th, 2008, 8:17 am

How to protect emerging market dollar reserves

May 12th, 2009, 9:19 am

http://www.voxeu.com/index.php?q=node/3551:What do you guys think of this suggestion? Would the US feel too constrained if such a programme were demanded? i'm not sure it is even feasible given the relative size of both markets?
 
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hamster
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Joined: October 12th, 2008, 3:51 pm

How to protect emerging market dollar reserves

May 13th, 2009, 5:53 pm

hmm, tips, no inflation tricks? i am not sure if us gov will be happy about it. i would recommend that china, middle east, and so forth come up with a big, huge list of local projects, hiring to larger extent us subcontractors, and pay them in usd. in other words, the should flip their trade deficit. actually, it's unevitable and would be a win-win.
 
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BullBear
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Joined: August 18th, 2007, 8:33 pm

How to protect emerging market dollar reserves

May 21st, 2009, 7:37 am

They can sell some of their US exposure at fair value and diversify buying other currencies and/or increase investment abroad (internationalize, including moving into the US) if they want!Why are they holding US assets (treasuries, currency) if they believe the US economy will be worse than the rest of the world?It's like the EU IBs that bought treasury bills at 0 but were saying that the US economy would be much worse than the EU economy. It doesn't make any sense to me. I buy US assets because I believe the US economy will fare much better than the EU economy.*Why were europeans buying t-bills at 0 if they believed in their economic region vs. the US economy?* I'm not saying my decision is right (the future will tell if I was right or wrong), just the economic reasoning I try to follow. ** I really don't get the EUR/USD - S&P - EU stock market correlation. I can't find the fundamental economics of this correlation. I don't understand it. I get the emerging markets vs. developped economies and USD/EUR vs. Yuan/Real/... but I don't get the EUR/USD - S&P correlation. It's being the hardest thing to me. The market fluctuates and I can't figure out the underlying reasoning for the fluctuation. I mean, I'm not complaining of it going against my decision, I'm complaining of not understanding it and not being able to get the economic reasoning of the huge rally on the EUR/USD when everybody thought the US economy was going bust and now this massive decline in the EUR/USD when the market anticipates a recovery in the US economy later this year and 2010. *** Also, everybody's buying oil like crazy and are bearish on oil stocks and the stock market? They are bearish in the US economy and buy crude oil? I think the US economy represents 25% of the world consumption of oil! I'm bullish on oil because I believe in a recovery in the US + China + Emerging markets not just EM. Are they buying oil like crazy being bearish on the US economy? Ooops!
Last edited by BullBear on May 20th, 2009, 10:00 pm, edited 1 time in total.
 
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antk
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Posts: 2
Joined: November 19th, 2008, 8:17 am

How to protect emerging market dollar reserves

May 21st, 2009, 11:36 am

I think an important one to look at when looking at eurusd is the front eurodollar. Jul 2008, when the cross moved from 1.60 down to circa 1.25, the front eurodollar sold off approx 100 ticks in the same period. This was a period where no one expected the fed to be hiking. Instead we had lehmans go bust , libor ois blowing out to historical levels, o/n dollars tading above 10% etc dollars were king. Hence they ended up down at 1.25. However, at the start of dec 08, when the eurusd cross went from the high 1.20s to mid 1.40s, the front eurodollar rallied approx 100 ticks. ( i know they cut again, but the libor ois situation was beginning to improve before large falls end of dec start of jan 09). Also, if you look at the situation since the start of april, libors have been collapsing and the front ed has been marching higher - and the eurusd has gone from circa 1.29 to where it is today. My feeling on this is that its quite important to look at the libor ois situation when looking at eurusd - as the premium on dollars lowers - i feel the cross will go higher - question is for how much longer can libors fall? Do we get another blow out. 3m usd libor came in at .66125 today...usd 3s1s basis is collapsing as well...i think eurusd can march higher for another while. Granted better equity markets do help libors to go lower. So alot will count on whether equities can keep going also. But my feeling is that equities will come off on the back of some sort of negative dollar funding story - either bank or corp related. But all appears fine on that front for the time being....so stay long until you see a turn in the libors.
 
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BullBear
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Joined: August 18th, 2007, 8:33 pm

How to protect emerging market dollar reserves

May 22nd, 2009, 4:57 pm

The ECB will have to cut interest rates (keep low IR) or face the risk of a depression. Also, some central European banks (swiss and german) are in a very bad shape. Real estate in europe is extremely expensive. If the ECB raises IRs people will have a hard time to repay their mortgages and defaults will rise. Unemployment is already at extremely high levels and the worse of the recession isn't over in Europe yet. There's still the risk of a collapse in the Eurozone (including the EUR) if unemployment keeps rising in some EU countries. This artificial high EUR is burning some EU countries. This is a very heterogeneous economic union...If the ECB raises rates the EU economy will have a hard time. Unemployment will keep rising, people will default on their mortgages and the real estate bubble in the EU will burst. The depression risk in EU is still "alive"...The EU is far behind the US in the way to a recovery! (I don't know when but one day the EU (ex-UK) will have to face the same tough environment the US is solving now - housing bubble)So, I think this EUR/USD rally is a complete nonsense but we'll see. I'll also pay attention to the losses the swiss and german banks are taking, this quarter, in treasuries and shorting equities + lower revenues due to the economic slowdown + losses on derivatives and junk ABS + losses in RMBS if they stress the economic outlook like the US banks did, due to high unemployment in the EU!
Last edited by BullBear on May 21st, 2009, 10:00 pm, edited 1 time in total.