Nedbank’s Neels Heyneke and Mehul Daya are concerned about dollar liquidity on Tuesday.
And that makes Tuesday a lot like every other day since early 2018, because Heyneke and Daya have been pounding the table on the myriad factors conspiring to tighten global financial conditions for at least 14 months.
In case you weren’t paying attention last year, a lot of the concerns they voiced early in 2018 were borne out in one way or another, leading, ultimately, to a scenario where USD “cash” outperformed pretty much everything on the planet, a testament to tighter Fed policy and a recipe for cross-asset turmoil.
The last time we checked in on Heyneke and Daya was – checks notes – five days ago, when we excerpted some passages from what, at the time, was their latest note expounding on the risks to the outlook. In the course of discussing the latest developments on the monetary policy front, Nedbank said the following:
Now it is a question of whether the central banks would follow through, how big the stimulus would be and whether it can overcome shrinking global trade that is leading to a contraction in global liquidity and economic growth.
In their latest note, out Tuesday, Heyneke and Daya follow up on that.
“Asia has become an important source of Global $-Liquidity through various financial channels (i.e., China’s credit cycle, South Korea’s exports) over the past two decades”, they begin, introducing the following chart which shows Asia’s Financial Condition Index leads global trade by roughly three months.
Heyneke and Daya then segue into the trade discussion, noting that while global trade “is a function of many underlying economic factors [including] animal spirits and trade policies, a significant portion of global trade since the 2008/09 GFC could be explained by the change in global central banks’ balances sheets.” Here’s a visual for you:
“When central banks are adding liquidity to the financial system, sentiment improves and global trade remains healthy [and] the opposite is also true”, Nedbank flatly states.
In case it’s not clear from the chart header there, Heyneke and Daya are in the camp that believes a liquidity injection/reflation effort is desperately needed in order to head off a potentially undesirable outcome.
They go on to tie this all together, reminding you that “the global velocity of money is extremely low” and that both the Fed’s balance sheet “and the US trade deficit remain important drivers of Global $-Liquidity.”
That latter point speaks to the inherent perils of current trade policies. “Global USD supply by means of trade has remained lacklustre, exacerbating USD shortages”, Heyneke and Daya add, before reiterating that “as long as the USD remains relatively strong on Global $-Liquidity factors [and] interest-rate differentials, risk assets will likely suffer from bouts of volatility.”
As you’re probably aware, the Fed’s dovish pivot has so far failed when it comes to vindicating dollar bears (including, by the way, Goldman). The dollar’s resilience comes courtesy of the whole “cleanest dirty shirt” narrative and that’s one of the many paradoxes of the coordinated dovish pivot.
Theoretically, a synchronized about-face by global central banks is just what the doctor ordered as growth decelerates, but as other central banks follow the Fed, it negates some of the dollar weakness that should “naturally” accompany a less aggressive FOMC. Between that and the relative resilience of the US economy, the greenback refuses to roll over in a meaningful way, potentially short-circuiting the nascent policymaker reflation push.