Heavy Is The Head

Heavy Is The Head

The dollar is out of favor — perhaps you’ve heard.

When it comes to the greenback, the market is concerned about a veritable laundry list of ostensibly bearish developments including, but not limited to, the US government’s inability to corral corona (so to speak), the implications of the public health crisis for the world’s largest economy, and the read-through for fiscal and monetary policy.

This confluence of factors isn’t just weighing on the dollar, it’s raising questions about the currency’s reserve status, and dysfunctional politics in D.C. aren’t helping matters.

Read more: Why ‘The Tide Is Going Out On US Dollar Exceptionalism’

Fund managers polled by BofA are the most bearish on the dollar ever, a development the bank attributes “at least partly [to] expectations of some erosion of the hegemony of USD as a reserve currency”.

Given the above (and recent trends) it’s hardly surprising that leveraged fund positioning flipped for the first time in years last week.

The other side of that is obviously optimism around the euro, which has benefited handsomely from i) the region’s relative “success” at flattening virus curves after a harrowing few months and, especially, ii) the establishment of the jointly-guaranteed recovery fund, which marked the first step towards a fiscal union (see “A Good Slippery Slope“).

Some believe upbeat sentiment around the common currency is overly ebullient, even if the bullish case remains intact. The resurgence of COVID is one obvious risk. “Positioning just gets more extreme”, SocGen’s Kit Juckes wrote Monday, adding that “the recovery fund was a significant step in the right direction for Europe, and we have a very non-consensus view of Europa/US growth differentials that underpins a long-term bullish euro view, but as COVID spreads along the summer vacation hotspots in Europe, I still think this move has gone too far, much too fast”.

In any event, rampant bearishness around the dollar isn’t likely to abate completely until there’s some reason for the market to believe the fundamentals are poised to improve. The figure (above) shows positioning against real yields, the key driver behind greenback weakness and gold strength. Below, find positioning plotted with DXY, alongside the 7-day average of COVID cases stateside.

This is just another market dynamic that is inextricably bound up with the evolution of the virus and nations’ relative success (or, in this case, failure) to bring the pathogen to heel.

In America’s case, the lackluster COVID response is generally seen as emblematic of government dysfunction and, perhaps, outright political decay.

Although de-dollarization is a glacial process, one thing that could speed it up is the perception that the US is becoming ungovernable.

In the BofA survey mentioned above, some 40% of respondents said they anticipate USD reserves will decline over the next 12 months.

Heavy is the head that wears the crown, apparently.


4 thoughts on “Heavy Is The Head

  1. The actual line on which the modern idiom ‘Heavy is the head’ grew out of is from the closing couplet of the insomniac King Henry IV’s introductory soliloquy in Henry IV Part II:

    How many thousand of my poorest subjects
    Are at this hour asleep! O sleep, O gentle sleep,
    Nature’s soft nurse, how have I frighted thee,
    That thou no more wilt weigh my eyelids down
    And steep my senses in forgetfulness?
    Why rather, sleep, liest thou in smoky cribs,
    Upon uneasy pallets stretching thee
    And hush’d with buzzing night-flies to thy slumber,
    Than in the perfumed chambers of the great,
    Under the canopies of costly state,
    And lull’d with sound of sweetest melody?
    O thou dull god, why liest thou with the vile
    In loathsome beds, and leavest the kingly couch
    A watch-case or a common ‘larum-bell?
    Wilt thou upon the high and giddy mast
    Seal up the ship-boy’s eyes, and rock his brains
    In cradle of the rude imperious surge
    And in the visitation of the winds,
    Who take the ruffian billows by the top,
    Curling their monstrous heads and hanging them
    With deafening clamour in the slippery clouds,
    That, with the hurly, death itself awakes?
    Canst thou, O partial sleep, give thy repose
    To the wet sea-son in an hour so rude,
    And in the calmest and most stillest night,
    With all appliances and means to boot,
    Deny it to a king? Then happy low, lie down!
    Uneasy lies the head that wears a crown.

    The lines are near and dear to me, as I’ve played the insomniac King. The theme of Kings not being able to sleep is strong in several of Shakespeare’s plays, where everyday people’s ability to sleep is often envied. If he were writing today, I doubt very much he’d be writing about everyday people’s ability to sleep…

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