Friday, Dec 15, 2023

the dollar outlook, game accounts, liquidity flat, hodlers holding

“Ah, but I was so much older then, I'm younger than that now.” – Bob Dylan ||

Hello everyone, and happy Friday!

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IN THIS NEWSLETTER:

• Dollar down

• Blockchain games as bank accounts?

• Key signals

WHAT I’M WATCHING:

Dollar down

This week seems to have marked an inflection point in dollar sentiment. The currency had been trending down anyway since the local high back in October, but the Fed’s comments turned the downward slope into a sharp drop.

(chart via TradingView)

What has shifted? It’s not just the FOMC statement and Powell’s comments. John Authers’ newsletter in Bloomberg this morning points out that the Fed’s “pivot” gave other central banks the opportunity to also talk up the possibility of cuts – and none of them took it. The Bank of England stressed that there is still “a way to go” before rate cuts can be contemplated. Norway actually hiked. And the ECB energetically pushed back against expectations of cuts in Q1, even though it has more room to cut than the US (a faster CPI deceleration) and has more urgency to do so (a weaker economy).

(chart via Bloomberg)

Plus, there’s growing expectations of a Bank of Japan hike. A Reuters poll published this morning shows that 80% of surveyed economists expect an unwinding of Japan’s easy monetary policy by the end of 2024, with 20% betting that the first move comes as soon as next month.

So, if markets are interpreting the Fed’s statements this week correctly and US rates do start to come down within the next few months, funds are likely to flow out of dollars into other currencies. We’re already starting to see this – in the 24 hours following Wednesday’s FOMC statement, the DXY index dropped around 2%.

(chart via TradingView)

This is even before we take into account the likely “money printing” that will be needed next year to finance the ballooning deficit. The accumulated US deficit for the first two months of the 2024 fiscal year was announced on Tuesday – already it is up to $381 billion. Annualized, this gives a deficit of $2.3 trillion (vs $1.7 trillion in FY 2023 and $1.4 trillion in FY 2022), and that’s not taking into account any extra pre-election spending or defense measures. According to the Committee for a Responsible Federal Budget (CRFB), lawmakers are currently pushing for bills that would add another $675 billion to the total if enacted on a temporary basis. The extra load would be $2.73 trillion if the bills become permanent.