Iran Unchained? The Greenback Causing Emerging Market Grief

Weekly Report - 07/05/2018

The Greenback Causing Emerging Market Grief


Last week the Fed kept interest rates unchanged, likely raising them next month. As with prices of all things, Lord Darlington’s quip from Lady Windermere’s Fan by Wilde, defining the cynic as one who knows the price of everything and the value of nothing is particularly apropos of the capital markets. For without knowing where prices were over time, the definition of value, knowing the price of something tells nothing about whether the seller overcharged or the buyer got a bargain.

Last Week

More importantly and this is really Oscar Wilde’s point, not knowing the value of something but only its price blinds us to the worth or benefits that accrue to owning the asset in question.  Thus it is with the greenback. When it was cheap many investors bought it to buy other currencies that paid higher interest rates. This technique called the “Carry Trade” is quite simple and widely employed. You but a relatively weak currency as the US Dollar was for the 1st quarter of the year and buy another currency that pays a higher interest rate that the US Dollar. Simple. Straight forward. However as the interest rates in the US are rising this trade is no longer profitable and must be unwound (Meaning: Reversed or closed). Particularly emerging markets where the interest rates were relative to the US higher, those emergers’ currencies are now under threat as dollars are withdrawn and the values of those currencies weaken relative to the greenback. Argentina raised its interest rate twice last week to combat just this circumstance. Formerly a burdensome rate of 27.5% the current price for the Peso is a cool 40%. Things are changing and the US dollar is a pinion in the global tectonics.


The Week Ahead

In the opinion of the analysts here at Alvexo, the undisputed issue of highest importance this week is the pending renewal of the JCPOA commonly referred to as the Iran Deal. This is a matter of such gravitas that the world waits with baited breath as to what the US administration will do. All signs indicate to us that the decision to withdraw the US from the agreement is likely to be implemented. The US president’s newly minted Secretary of State and National Security Advisor are both in favor of scrapping the deal. Despite Ms. Merkel’s and Mr. Macrons full court press last week to the contrary. The price of oil is already reacting with WTI and Brent at 70.50 and 75.50 respectively. This is so precisely because of concern that a collapse of the deal will reign havoc on the already smoldering Middle East tinderbox and subsequent to the withdrawal prices of oil, and plenty more too, will likely make today’s prices seem a bargain. This, we believe will hold true for the value of the US Dollar and likely the Cryptocurrencies and the Japanese Yen as both assets have been behaving as safe haven assets of late.


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