Where Does The Dollar's Impact End?

“Learn how to see. Realize that everything connects to everything else.”
- Leonardo da Vinci

Welcome to another Friday! One where hopefully what you read this morning will be different than any other thing you read about elsewhere.

My overall thoughts outside of trading hours while we have been going through our first quarter of Quad 4 has been: the U.S. is damn lucky to be the reserve currency of the world.

As I play out all the cause and effects of the current economic environment, the international landscape is much worse.

I think about the dollars break out and its impact on international trade, capital/financial accounts, and local inflation. Just look at the breakout in yields in the context of mortgages, cost of living, and real wages. I’m 100% sure that the interconnectedness is much deeper than just this small list. Just look at pension funds in the U.K almost getting margin called…

All of this has created some fascinating conversations with friends and family who are still trying to understand the U.S. economy and why we are seeing stocks come down. Which begs the question of: how many people in the U.S. are just coming to the realization of an economic downturn or have yet to come to that realization? But that further creates the assumption: if you are still trying to figure out local economic conditions it is extremely unlikely that you have figured out foreign economic conditions.

Just some early morning thoughts from a young lad that really just wants to show you some data to contextualize emerging markets with US Dollar denominated debt.

Back to the Global Macro Grind…

One of the many lessons I got from our most recent Macro Themes deck was slide 34 from Dr. Drake. The blue line on the right hand side chart shows that there is $13.371T of foreign dollar denominated debt (debt that has to be paid in US Dollars). That is just 64% of US GDP, 91% of China GDP, or 42% of the S&P 500’s market cap (254% of FAANG’s market cap).

Diving into the black line on the right-hand side chart is where I was going to focus today. That represents $4.221T of emerging market economies with dollar denominated debt. Simply put, this type of debt gets easier to pay when a countries currency appreciates vs the dollar. Although it gets much harder to pay for when a local currency depreciates vs the dollar. So, when the dollar index is up +18% YTD, this short dollar position starts to matter a lot more.

In the Chart of the Day the black bars are how local currencies have performed YoY vs the dollar and the blue bars are the outstanding US Dollar denominated debt as a percent of a country’s GDP.

Some of these numbers are incredible, like Chile having so much dollar denominated debt that it equates to 46% of GDP… or how about Turkey, Argentina, Chile, Saudi Arabia, and Mexico all having a ratio greater than 20%. Or how about Turkey, Argentina, South Africa, South Korea, and Chile all having their currencies down more than 15% vs the dollar YoY.

A couple side notes: Saudi Arabia has a currency that is pegged to the dollar so this type of debt impacts them less. In Mexico, Keith was talking on @hedgeyeRJM’s (the Robert McGroarty) twitter space that the Peso broke trend on Wednesday. In Turkey, they just cut rates by 100 bps which equities have been liking, even though the currency is down -49% YoY (I’m not going to tell the equities what to do, just make money).

Then you look at these country’s CDS, and the trends there start to make more sense. All but one country has rising CDS MoM, with the average MoM increase being +19%.

Here are all the tickers for countries listed: Turkey $TUR, Argentina $ARGT, South Africa $EZA, South Korea $EWY, Chile $ECH, Taiwan $EWT, Malaysia $EWM, China $FXI, India $INDA, Indonesia $IDX, Saudi Arabia $KSA, Mexico $EWW, Brazil $EWZ, and Russia $RSX

Let’s get into the data of what happened overnight:

The ETFs up the most yesterday: Interest Rate Hedge $PFIX (+6.9%), Palladium $PALL (+3.9%), Platinum $PPLT (+3.8%), Kuwait $KWT (+2.5%), Indonesia $IDX (+2.2%), Saudi Arabia $KSA (+2.1%), Malaysia $EWM (+2.0%), and Poland $EPOL (+1.9%). While the ETFs down the most yesterday were financials and insurance: Property & Casualty $KBWP (-4.0%), Regional Banks (-3.4%), and Insurance $KIE (-3.0%).

• The VIX closed at 30.31 although intraday got to 29.77, the low end of the risk range yesterday was 29.75. Just a measly 2 bps from the low end of the risk range!
• The 2-10 spread remains at -35 bps with the 1yr forward at -39 bps
• Sovereign CDS spreads are dancing around cycle highs, no real movement that hasn’t been called out already
• IVOL Discount Callouts: Cannabis $YOLO, Banking $KBE, Small cap Energy $PSCE, Silver $SLV, Pound $FXB
• IVOL Premium Callouts: Greece $GREK, Chile $ECH, China $FXI, Malaysia $EWM, Singapore $EWS, Self Driving Technology $IDRV, Semiconductors $PSI, Social Media $SOCL, Healthcare Equipment $XHE, Corn $CORN, Rare Earth Metals $REMX, Yen $FXY, 20+yr Govt $TLT, 10+yr Corp $IGLB
• New Zealand $ENZL credit card spending +34.1% (Sep) from +29.3%. Although the savings rate in New Zealand is down from 26.6% in Feb 20 to 20.0% in June 22
• UK $EWU Retail Sales Volume was down -6.9% YoY (Sep) from -5.6% YoY. UK Retail Sales Value was +3.9% YoY from +5.0% YoY

• Meaning consumers spent 3.9% more for 6.9% less goods
• UK public sector net borrowing (Sep) remains negative for the last 8 months
• Turkey consumer confidence (Oct) accelerates for the 4^th consecutive month, from a record low in June and creating a 1yr high.
• Switzerland $EWL M2 (Sep) comes in at -0.6% YoY. Other moments in time this went negative: Feb 20, 2006-2008, March 2000 – Sep 2001.
• Turkey lowered interest rates by 100 bps yesterday
• China held interest rates flat yesterday
• Indonesia raised interest rates by 50 bps yesterday
• Germany $EWG PPI held flat at its ATH of +45.8% YoY yesterday, up +2.5% MoM. Energy (132.2% vs 139.0% in August). Fertilizers and nitrogen compounds (33.5%)
• Energy inventories for Distillate and Gasoline remain well below their 5yr ranges. This is while SPR continued to decelerate.
• CPI-PPI Divergence (Sep) remains above a 2.0 Z Score for: Japan $EWJ, Germany, UK, Taiwan, Poland, Norway $NORW, Denmark $EDEN, Colombia $GXG, and Czech
• Total Assets YoY at US Commercial Banks continue to approach 0.0% YoY. Currently at +1.6% YoY and have been decelerating every month since Nov 21.

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:

UST 10yr Yield 3.80-4.28% (bullish)
UST 2yr Yield 4.24-4.65% (bullish)
High Yield (HYG) 70.27-72.78 (bearish)            
SPX 3 (bearish)
NASDAQ 10,214-10,898 (bearish)
RUT 1 (bearish)
Tech (XLK) 113-123 (bearish)
Energy (XLE) 77.38-85.41 (bullish)
Financials (XLF) 29.54-32.50 (bearish)                                  `              
Shanghai Comp 2 (bearish)
Nikkei 26,007-27,326 (bearish)
DAX 11,948-12,820 (bearish)
VIX 29.18-34.43 (bullish)
USD 111.41-114.20 (bullish)
EUR/USD 0.963-0.987 (bearish)
USD/YEN 145.60-151.94 (bullish)
GBP/USD 1.087-1.140 (bearish)

Have a great day out there,

Ryan Ricci
Macro analyst