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.