July 10, 2020
AliExpress WW
Ready For Another USD Rally?

Ready For Another USD Rally?

AliExpress WW

Posted by Stephen Vannelli on the Knowledge of Capital Leaders blog,

AliExpress WW

As financing problems arose in March, the dollar rose. Then the Fed began to conduct large currency swaps as a way of lending US dollars to foreign central banks, intended ultimately to lend to borrowers in need of US dollars. Since currency swaps reached nearly $ 500 billion, allocated mainly to Japan and Europe, the US dollar adjusted by 7%, from 1300 BBDXY to 1200.

Now that liquidity has been eliminated, F / X swaps are accumulating, leading to a sharp drop in the Fed balance last week. After the swaps, the dollar rose again, about 2% in the last couple of weeks.

In our opinion, if there were no F / X swaps, the US dollar would naturally be on the glide path, as oil reserves went up. BBDXY has a fairly good historical correspondence with oil reserves – both crude and refined – not including the Strategic Oil Reserve (SPR).

To give some insight into the distortions caused by the COVID-19 crisis in the energy markets, Gasoline stocks in the US are completely unsuitable from a seasonal point of view. Stocks tend to peak in winter and decline in autumn, as driving gets warmer.

With daily gas demand still around 20% lower than last year, stocks in June are at their highest level for the year, while they should fall by about 100-200 million barrels from winter peaks.

The level of oil reserves suggests BBDXY at 1300, or about 5% higher from here.

If the F / X swaps close, then perhaps the fundamentals may reappear, and we should be prepared to continue the dollar rally.

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