Those investors who are currently facing biggest losses in the market of US T-bonds since 1978 can expand their list of potential problems since the central banks of emerging economies are getting rid of UDS reserves. i.e. they are selling the US Dollar.
The expectations that the Fed, the biggest buyer of US Treasury bonds, may stat tapering the $85bn-per-month bond purchase program have already contributed to the fact that the US debt is down by 4,1% along with the USD strengthening against emerging currencies. This is the biggest strengthening since 2001. The central banks of Russia, Brazil, India and Indonesia have already conducted currency interventions. The very fact confirms that they are getting rid of US securities. The fact is also confirmed by Scotiabank and Bank of America Corp.
What awaits the US Dollar in the near future? Let’s ponder on this question together with Masterforex-V Academy.
Soros Anticipates US Stock Market Collapse
Soros Fund Management, George Soros’s investment fund, has recently invested $1,25bn in put options on ETF S&P 500.
Such investments are usually made when a major decline in the market of the underlying asset is expected with a certain period of time until the expiration of the option. In February, Soros managed to make $1bn on the decline of the Japanese Yen.
Soros is one of the world’s most successful investors and financiers. Now he bets on the decline of the US stock market.
Those put options on ETF S&P 500 give Soros the right to sell the underlying asset (ETF S&P 500) at a predetermined price. Still, experts say that we cannot be sure that Soros is currently betting against the major bullish trend since the details of the put options are unknown, i.e. we don’t know the strike, the expiration date and other major parameters.
Meanwhile, experts say there are reasons to expect market weakness in the near future. Moreover, S&P 500 has gained 21% over the last 12 months, which means US corporations are too costly while their dividends are below US bond yields.
Obviously, we cannot ignore the fact that Soros bought put options on ETF S&P 500. This is not the first time Soros bets against the market. In fact, he has made his fortune mostly buy playing against the market. In 1992 he made $1bn.
US Bond Sellout. Consequences For US Dollar?
Central banks around the globe are reducing their exposure in the market of US Treasury bonds. At this point, they have abandoned $48bn in T-bonds, which is less than 50% of the total sellout in the market of US T-bonds ($113bn) seen over the last 3 months. This is probably hints at some changes in the existing market tendency. Apparently, the US T-bond market is facing a deficit of buyers.
The flight of capital form bonds and stocks is connected mainly with the current weakness of emerging currencies since the Fed is intended to start tapering the accommodative policy (QE, bond purchases) that devalued the US Dollar.
Usually, weaker national currencies make exports more affordable and attractive for importers by means of increasing competitiveness. Still, the current pace of currency devaluation in such countries as India and Indonesia threatens to lead to even higher inflation, thereby scaring away foreign investors, Westpac Banking Corp reports.
Since May 2013, foreign investment funds have withdrawn over $47bn from emerging markets. According to EPFR Global, the net flight of capital may reach $7,5bn this year. Experts say that any country is glad to have a reasonably weak currency until the devaluation is so high that it undermines the very image of the currency, thereby leading to even higher inflation.
Brazil starts reacting to the situation. Its currency reserve is around $372bn. On August 22nd, the Brazilian government announced a currency support program. The Brazilian Real is down by 11% this year. The authorities are planning to allocate some $60bn to fight the weakening of the national currency. After the announcement, the currency regained 3,4%.
India is selling out its dollar reserve to major oil importers since the Indian Rupee has depreciated versus the US Dollar down to the all-time low of 68.845. Even though India’s investments in UST-bonds are up by 2,9% (to $61,2bn), the pace of investment is declining (for comparison sake, 37% in 2012).
Not so long ago, Indonesia also conducted a currency intervention in order to support its national currency, thereby preventing it from further devaluation.
Russia has pegged the national currency to the bi-currency basket of EUR and USD. The central bank has been conducting currency interventions since May in effort to curb the devaluation. As of September 3rd, Russia sold $11,4bn.
The chart below, courtesy of Masterforex-V Academy, reflects the current state of affairs in the market of USD index (DXY). It keeps trading within the strategic price range of 81,81 - 81,79:
