The Last Leg of a Very Strong Dollar
The Case of Positive Real Interest Rates: Emerging Market Crisis and Massive Bitcoin Adoption.
The current financial landscape is dominated by discussions around the weakening of the dollar, with the DXY breaking critical levels. However, we present a different thesis that the dollar has been on a bullish megatrend since 2014 and is now poised for an upside leg, driven by four key moves—energy dynamics, geopolitical developments, global supply chains and positive real interest rates.In this post we analyze these moves and their implications for the global economy. Especially for emerging markets and bitcoin.
Dollar cycles have proven themselves to be highly effective for forecasting, particularly in a globalized world. Nevertheless, we must confront the current reality head-on—a reality defined by a significant transition from globalization to localism. This profound shift demands a new framework. A complete reevaluation and rewiring of our global supply chains and manufacturing processes. This transformative movement first took root in 2014 and has since gained unstoppable momentum, magnifying the scope of challenges and opportunities before us.
Four legs of a very strong USD.
1. The Beginning: 2014 Shale Oil Revolution and Crimea Annexation The first significant signal of the USD bull market move was the emergence of US energy independence due to the shale oil revolution. Between 2005 and 2014, the US transitioned from being a net importer of 10 million barrels of oil to just 1 million barrels, impacting offshore dollar dynamics. Additionally, geopolitical events like the Crimea annexation also influenced the dollar's strength during this period.
US net imports of crude oil. Source. EIA.
📈 Forex Market Flashback: July 2014 - Jan 2016 📉
During this period, the foreign exchange landscape witnessed significant fluctuations:
💹 USDRUB: +150% 💹 USDBRL: +103% 💹 USDCOP: +83.90% 💹 USDNOK: +51% 💹 USDEUR: +26% 💹 USDJPY: +23%
2. Second Move: 2018 Trade Wars & 2020 Pandemic The second move in 2018, characterized by trade wars and the 2020 pandemic, had a substantial impact on commodity currencies such as USDRUB, USDBRL, USZAR, and USDNOK. However, developed reserve currencies like the Euro and the Japanese Yen were less affected. While the crisis affected some emerging markets, India managed to withstand the impact relatively better.
🇺🇸USD/BRL: +64% 📈 🇺🇸USD/NOK: +34.68% 📈 🇺🇸USD/COP: +33.65% 📈 🇺🇸USD/RUB: +17% 📈
3. Third Leg: Rewire of Global Supply Chains and Ukraine War (2021) The third move, observed in 2021, was a consequence of the pandemic and the subsequent rewiring of global supply chains. This transformation heavily impacted currencies, with the Japanese Yen and the Euro experiencing significant movements. Latin American currencies, such as USDBRL and USDCOP, demonstrated a particularly bullish behavior during this time.
Total Construction Spending Manufacturing United States. Source: St Louis Federal Reserve.
4. Fourth Leg: Positive Real Interest Rates and Geopolitical Instability (2023-2024)
Real Interest Rates. Source : St Louis Federal Reserve.
The final and perhaps most radical move is linked to positive real interest rates. Positive real interest rates signify a reckoning day for the "zombie economy" while simultaneously consolidating tech companies that enhance global productivity. They are also associated with secular bull markets in the US.
However, we must approach this environment of positive real interest rates with a cautious eye, as it raises the likelihood of currency crises in emerging markets. Past periods, like those observed in 1980-1985, 1991-1999, and 2007-2009, have demonstrated the potential for significant surges in such events during similar periods.
Source international monetary fund. Luc Laeven and Fabián Valencia
A potential crisis in the emerging market has the potential to ignite a significant adoption of Bitcoin. As a decentralized and resilient digital currency, Bitcoin's appeal as a safe-haven asset during economic uncertainty could lead individuals to seek refuge in its unique properties, such as limited supply and store-of-value characteristics.
Bitcoin Price logarithmic.Source: Tradingview.
Conclusion:
Based on our analysis of the four moves of a strong dollar and the potential impact of positive real interest rates, our assessment suggests that the dollar is poised to maintain its upward trajectory.
Given the prevailing geopolitical instability and recurring currency crises in emerging markets, it is prudent for residents of such regions to consider a strategic shift towards saving in dollars. Additionally, exploring the possibility of building digital collateral using Bitcoin could provide a viable alternative in safeguarding wealth amidst uncertain economic times.
Disclaimer: This report is for informational purposes only and should not be considered as financial advice. Readers are encouraged to conduct further research and consult with financial professionals before making any investment decisions.
Guillermo Valencia A
Brazil, July 20th