☀️☕️ Diving Dollar; The flawed DXY

📝 Focus

• Diving Dollar

• The flawed DXY

📊 In the Markets

• Who’s Squeezing Who?

• More 0DTE on Nasdaq

• Happy Cyber Monday!

• Normal(ised) Japan

📖 MoneyFitt Explains

🎓️ Black Friday and Cyber Monday

💸 Personal Finance Corner

• Bitcoin 101: Definition, Reasons for Purchase and How Its Created

📝 Focus

Diving Dollar  

The US dollar has been sliding. It’s down against major currencies like the euro and the Japanese yen, though the rather flawed US Dollar Index (DXY) is what traders often look at to determine the overall direction of the currency. That’s down 3.1% in the last month alone. This is a change from the strong dollar performance earlier in the year, driven by Fed rate hikes and surprisingly robust economic data.

The slide has been attributed to several factors, primarily the prospect of lower interest rates. Despite comments from Fed officials, recent data coming in about the mild slowing of the US economy and inflation inching down close to the 2% target rate have raised expectations of a less “hawkish” stance, meaning that not only is the Federal Reserve likely slowing down the pace of interest rate hikes, but that the likelihood of the next move in rates is expected to be down.

But if USD weakness is the result of lower inflationary pressures, it’s worth noting that in 2022, the total value of imports of goods and services came to $3.96 trillion, the highest figure since the turn of the century. Imports make up 14.59% of GDP (vs about 10% for exports.)  So if the USD weakens much more, it could, ironically, lead to higher inflationary pressures from the higher prices of imported goods, potentially pushing rate cuts further out into the future than market “experts” are currently expecting.

..... ▷ This shift in the narrative may impact investment strategies, with the weakening dollar somewhat undermining the bullish case for US equities, potentially favouring emerging market equities and commodities. 

Dollar weakness, if it continues, provides relief for emerging market economies, making repayment of dollar-denominated debt cheaper, the reverse of the situation a year ago when the dollar was on a tear. 

While MSCI's emerging market stocks index has risen by 3% this year, it lags significantly behind the 19% increase in the US S&P 500.

..... ▷ The price of gold, oil and the US dollar are tightly intertwined, impacting each other through complex interactions. 

Gold is traditionally a safe-haven asset sought after during economic uncertainty. When the US dollar weakens, investors often turn to gold, driving its price up. Conversely, a stronger US dollar usually leads to a decline in gold prices.

And sure enough, gold prices rose to a six-month high on the increasing conviction that the Fed was done with this interest rates cycle, with the weaker dollar buoying prices.

Oil is priced in US dollars, directly linking its value to the dollar's strength. A stronger US dollar makes oil more expensive for countries using other currencies, potentially reducing demand and lowering oil prices. Conversely, a weaker US dollar makes oil more affordable, potentially boosting demand and pushing prices higher.

..... ▷ On the other hand (of course, there’s another hand), global economic conditions, geopolitical tensions and supply and demand dynamics also influence these relationships. For instance, during economic uncertainty, both gold and the US dollar may appreciate at the same time as investors seek safe-haven assets.

DXY mini-explainer (and why we say it’s “flawed”)

Though currencies are measured against one another ("pairs"), one popular way to see how the US Dollar is performing against other currencies in general is to use the DXY (US Dollar Index.) The DXY rises when the USD is stronger than the other currencies in the basket and falls when it is weaker. Its all-time high was about 165 in 1985, and its all-time low was about 70 in 2008. It was originally set up by the Fed in 1973 and updated just once since, but just to adjust for the creation of the Euro in 1999.

The index measures the USD against a basket of six currencies that are among America's main trading partners: EUR (Europe), JPY (Japan), GBP (the UK), CAD (Canada), SEK (Sweden) and CHF (Switzerland). EUR makes up 57.6% of the basket, followed by JPY (13.6%) and GBP (11.9%.) 

The weightings are extremely out of date from a trading partner perspective, with the huge weighting of the Euro vs the ZERO WEIGHTING of the Mexican Peso (MXN) and the Chinese Yuan or RMB (CNY), the most glaring given that along with Canada, they're the country's three largest trading partners by far. (Switzerland: #17, Sweden: #35!)

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

Hong Kong-listed property shares fell on Friday, leading Asian markets mostly lower, as trader sentiment cooled on Beijing’s efforts to revive its (maybe) terminally sick real estate market with government-led financing support. Chinese developers listed in Hong Kong fell by 1.4%, though that only partially reversed the 4.9% rally seen in the previous session.

But Japan was up on core consumer inflation, increasing by 2.9% in October, following September's 2.8% increase. That brings the streak to 19 months of inflation, coming in above the 2.0% target of the central bank, the Bank of Japan (BOJ.) The thinking is that there could soon be a move by the BOJ to further normalise its ultra-loose monetary policy. The rise in prices has come largely from the weak yen and increased imported energy and commodity costs, so while higher interest rates may soften Japan’s moribund economy, it could lead to a stronger Yen by potentially opening the floodgates for a return of capital housed in other currencies. 

On Friday, the British pound surged, hitting its highest level against the dollar since early September due to an unexpected boost in the GfK consumer confidence index, raising hopes for robust (if probably imprudent) festive season spending. And the implication of that would be reduced prospects of an interest rate cut in the foreseeable future. As a result, gilt yields rose by 0.05%, reaching 4.31%. (“Gilts” are what UK sovereign government bonds are called because they are “gilt-edged” securities. Some say it’s because they used to be so secure that they may as well be edged in gold. Actually, it’s a term from the 17th century when the physical bond certificates really did have gilded edges.)

US stocks ended the week with mixed results in a holiday-shortened session, the S&P 500 extending its longest weekly winning streak since June by 1%. Treasury bond yields, notably the 10-year benchmark, rose by 0.06 percentage points to 4.47% as bond prices dipped (as yields and bond prices move in opposite directions.)

Meanwhile, Nasdaq expanded its zero-day options offerings to include Treasury and commodity markets, listing new contracts tracking popular ETFs in gold, silver, natural gas, oil and long-term Treasuries. Options allow traders to buy or sell at a fixed price by a specified date. 

The so-called zero-day options (meaning less than a full day till they expire) cater to traders wishing to bet on sharp, short-term market moves as a result of important data releases that may lead markets to react in a binary fashion, like an inflation or employment report, or to hedge their portfolios against such moves relatively inexpensively. 

But probably mainly for dopamine-rush retail speculation. What could possibly go wrong?

Zero-Day Options - a mini-explainer:

- An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date from or to the seller of the option. 

- A zero-day option (zero days to expiry, or 0DTE) is an option that expires on the same day that it is bought, which means that the underlying asset has little time to move before the option expires.

- Because of the low price (since the "time value" is super low), traders can make huge profits from relatively small underlying asset price movements, though the risk to options buyers of losing everything is very high.

Who’s Squeezing Who?

Reports from various data providers like S3 will point to the sharp rally in US and European stocks in the last month and (correctly) point out that it was turbocharged by a brutal "short squeeze" of hedge funds that had short positions in stocks in the tech, healthcare and consumer sectors (but also through ETFs and futures.)

This was especially so since the weaker-than-expected US consumer price inflation data was released in the middle of the month. 

Not that those squeezed shorts don’t hurt, but “losses” from hedge fund short positions ($43bn according to S3) only consider the reported short sides of their portfolios and don’t track the complex positions that usually also come as part of the same trade, such as matching long positions elsewhere directly in shares, in convertible bonds or in far more complex structures.

And hedge fund net market exposure remains modest because of long positions offsetting those short positions, even if gross exposure (the total of long positions and short positions in dollar terms) is high.

..... ▷ That said, it’s worth noting that hedge fund crowding is now the most extreme it has been in the 22 years that Goldman Sachs has tracked hedge fund positioning in its Hedge Fund Trend Monitor, which analyses over 700 hedge funds with $2.4tn of gross stock positions. 

Hedge funds have been piling into the AI and overlapping Magnificent Seven (Microsoft, Alphabet, Apple, Nvidia, Tesla, Amazon and Meta) trade all year. The latest GS quarterly report indicates that this reached a new record in the third quarter. 

..... ▷ This has, on purpose, been painfully squeezing underweight mutual fund managers and forcing them to chase those stocks. It’s like a short squeeze, but where the mutual fund managers are “short” only relative to the benchmarks that they live and die by.

Most mutual fund managers are required by their powerful risk management teams to go underweight stocks that would have an unbalanced, outsize position in their portfolios. And managers would be especially wary of those names if valuations are far from historical averages. 

But if the benchmarks continue to power ahead thanks to those names, and their performances lag further and further behind, all but the most resolute fund managers would have little choice but to chase these stocks even higher.

And it’s anyone’s guess when the music might stop.

Happy Cyber Monday!

Mastercard’s Spendingpulse reported that US Black Friday🎓retail sales (excluding cars) both in-store and online rose 2.5% compared to a year earlier as buyers were tempted out by deep discounting (averaging 30% by some reports), especially online as E-commerce sales rose by 8.5% compared to in-store sales rising by 1.1%. 

This seems soft as SpendingPulse had been expecting the whole November/December season to clock in at 3.7% higher, with some projections for Black Friday alone last week at 5%.

It looks even soggier as SpendingPulse figures are not adjusted for inflation. 

With the annual inflation rate for the United States coming in at 3.2% for the 12 months ended October, at first glance (without a breakdown of categories and price points of where the spending actually went), the Black Friday sales seem to be DOWN in “real” inflation-adjusted terms.

Let’s see how today’s Cyber Monday sales turn out.