Market Overview

The US Dollar Index (DXY) went down significantly this morning from a night peak of 103.76 to the 102 area after a surge yesterday. However, in general since the beginning of the week and even now after it rolled down, the US Dollar Index performed an increase of more than four %. Just over the last ten days the British Pound fell against the Dollar from the levels above 1.30 to 1.14 at the lowest point, the Euro dropped from the 1.13-1.15 area to 1.06-1.08 price range, and the Aussie lost more than one thousand basis points in a very volatile movement. Even previously so-called "safe haven currencies" such as the Swiss Franc and the Japanese Yen have fallen in price significantly during this week, not to mention the most affected currencies of emerging markets like the South African Rand, the Mexican Peso, the Turkish Lira or the Russian Rouble.

However, it's quite possible that such huge movements to strengthen the Greenback may not happen in the market anymore, although such a possibility should not be excluded. A sufficient set of instruments could be used in order to assess the probability of the possible powerful move of the US Dollar might be the wise approach in the current market situation.

To get the right decision the recent movements, however, should be properly assessed.

For many "old" traders such sharp appreciation of the US currency may remind technical analogies with the movements during the 2008-2009 crisis, when the Cable dropped from the 2.0 area to 1.35, the single European currency came from the 1.6036 peak to almost 1.23, and the Australian Dollar travelled from near parity zone to just reach the 0.60 level for less than four months. What was remarkable then was that gold futures also came down in 2008 from the highest point of $1032/toz in March to $681/toz lows in October that year. Analogies with 2020 are even more appropriate as investors in 2008 did not rushed into gold from the falling stock market, but mostly sold off rather expensive gold futures and spot contracts (which has tripled in price over the previous five years since 2003) in order to get cash.

Back in 2008, the catastrophic lack of the Dollar liquidity for investors to cover their big losses and for many others was also in place. That mainly explains the apparent "popularity" of the US Dollar at that time. The slogan "if America sneezes, the whole world will get sick even more seriously", offered by some economists spur a great "advertising campaign" in order to attract investors to purchase U.S. bonds as "the safest instrument" in those conditions.

The efforts enabled the American currency to strengthen almost every day in autumn of 2008 even though the Great Financial Crisis originated in the US. One should recall that both the mortgage bubble and the widespread use of "financial instruments of mass destruction" as they were called by Warren Buffett, such as credit default swaps (CDS) designed to "insure" the main body of investment portfolios became the chip that blazed the fire of the global financial turmoil.

However, the current pandemic situation seems to have nothing in common with what happened back in 2008, except for the overheated stock markets over the last five years, of course. The US economy is in one of its strongest shapes for recent decades. On the contrary, the rates of most central banks were already very low or even below zero in the beginning of 2020, and many regulators continued quantitative easing (QE) for years, only in smaller volumes. The loose monetary policy was designed to hale consumer demand, which has already been somewhat suppressed in recent years, and that's why some economists even used to talk about the threat of a recession. Nevertheless, it was more a theoretically issue before the pandemic gripped the world.

In short, if the world is currently dealing with a systemic problem in the financial system, it is more likely that the process of curing it with the flood of QE money will only postpone the crisis rather than refit it. Still, if the current situation is similar to the one we had in 2008 in some sense, then the similarities are primarily the speed at which the stock market dropped, which resulted in a deficit of the US Dollars. So, why investors need more cash in US Dollars, and not in other currencies? Because they have most of the brokerage accounts in the US Dollars and has to replenish them in case of a margin call, and because people still perform most of their investments in US shares and other instruments within the world's mostly developed financial system with bulk of liquidity. They also need money in US Dollars in order to back their trade transactions that are still prevailing in the global trade.

The above is true not only for the stock market, but also for the commodity markets and even for bond markets. When commodity prices fall sharply then it will force people to sell anything they see at the moment: gold futures or industrial metals futures, and sometimes even profitable shares and government bonds. They need money to plug budget holes that suddenly emerged everywhere, and that becomes the main driver for market sentiment. That is why there is such a huge deficit of cash and, first of all, the lack of the US Dollar. Bloomberg published an article on March 19 under the headline "Enormous De-Leveraging in Bond Market Smacks of Margin Call Rush" by Stephen Spratt, where he suggested that the sell-off in supposedly safe government secondary market and a slump in an open position in bond futures positions equivalent to $150 billion in ten-year Treasuries were sold Friday through Tuesday with total outstanding contracts in bonds dropping to the lowest since 2018.

This confirms the generally stressed situations on the forex market. In the coming days tracking the position of the US Dollar against other majors could therefore be useful along with tracking the sentiment on the stock markets. Any further enormous rise of the US Dollar may indicate a continuation of sell-offs in shares while breaks of the US currency growth and preferably the start of a steady downside correction for the US Dollar may indicate that the critical phase of the stock crisis comes to an end.

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