US dollar liquidity crisis

Posted By Darren Winters on Mar 19, 2020

US dollar liquidity crisis

Every major market-sensitive event, whether it be the 1992 Black Wednesday, the 2008 Lehman collapse 2008 and the 2020 global pandemic all have in common a US dollar liquidity crisis. See how market panics lead to a US dollar liquidity crisis.

So the US dollar double top, which I correctly forecasted in February was driven by a black swan event, a global pandemic becoming a reality.

When fear drives market capital flows from risk-on to risk-off or haven assets, such as precious metals and US treasuries, this increases the demand for US dollars

US dollar liquidity crisis

Extreme fear, triggered by black swan events, causes the sale of everything as investors scramble to raise finance to margin calls. In the recent 12 trillion US dollar margin call panic everything was for sale. Haven assets and stocks all moved down in price.

Extreme fear, measured when the VIX exceeds 80 as it did during the 2008 financial crisis, results in a dash to cash, particularly USDs, thereby creating a US dollar liquidity crisis

Put simply, in a rare event when the system breaks, panic selling plays out, the US dollar rallies into oblivion and that creates a US dollar liquidity crisis.

An endless US dollar rally can also trigger a US dollar liquidity crisis, bearing in mind that global loans, particularly in emerging market economies (EME) are made in US dollars. Total Credit to EME non-financial borrowers (excluding China) has surged, (trillions of US dollars), according to the BIS quarterly.

When the US dollar keeps appreciating that increases the cost of servicing foreign dollar-denominated loans, which also creates a US dollar liquidity crisis

The crux to the US dollar liquidity crisis in emerging economies is based on interest payments on US dollar-denominated loans being made in US dollars and not in the local currencies.

So when the US dollar appreciates, borrowers often need to raise more liquidity by selling assets. If the proceeds of the sale are in their currency, which is often the case they will then need to sell their local currency and buy US dollars. But that will cause the US dollar to appreciate further, thereby causing a vicious circle, further volatile markets and eventually a US dollar liquidity crisis.

The Fed, the world central bank by default, needs the US dollar to be stable which fosters an environment of stable financial markets.

The Fed, a private banking cartel with shareholders would most likely act to contain a US dollar liquidity crisis

An uncontrollable US dollar rally would blow up foreign dollar-denominated loans which would hit the bottom line of its shareholders.

The Fed monetary bazookas have swung into action to alleviate illiquidity in the bond market.

Trillions of dollars for repo markets, the launch of $700 billion QE5 and the return to ZIRP is evidence that the Fed has returned to emergency monetary policy.

So the Fed’s massive QE program and ZIRP could most likely weaken the US dollar making GBP look oversold.

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