BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Currencies

Dollar juggernaut still rolling on: Strongest in nearly 14 years

Posted on November 24, 2016

You know what they say: Buy dollars, wear diamonds.

The buck is not backing down, with the dollar index, which tracks its value against a basket of other major currencies, now up at its strongest level since March 2003.

Compared to some selected other currencies:

  • The euro is down at $1.0550, having earlier hit $1.0515, its lowest since early 2015.
  • The buck shot up to Y113.53 against the yen, having carves out a rise of over 2 per cent just since yesterday.
  • In EM, a key victim is Turkey, fittingly for Thanksgiving. With a Turkish rates decision coming up later, the dollar is up at an eye-watering TRY3.4136, a record low for the lira (again).

Kit Juckes at SocGen is feeling whimsical as he explains the shift:

The Pied Piper of Hamelin lured away the rats that plagued the town and when he wasn’t paid he lured away the children too. The bondland piper is luring away most of the world’s currencies to lower and lower levels against the dollar….

A strongish durable goods orders release, and a perception that easier fiscal policy is coming all over the world are cited as the catalysts for yesterday’s lurch higher in Treasury yields, but the underlying cause is that after 10-year yields halved between the end of 2013 and mid-2016, there were a lot of longs which are still being flushed out. Positioning isn’t going to stand in the way of bond prices falling which in turn is the fuel for the dollar’s advance.

The dollar index is testing 102, a level last seen in March 2003, and we expect a further 6% rise over the next few months. In broader trade-weighted term, the dollar is now within 2% of the 2002 peak which seems sure to break in the coming days, taking the dollar back to levels not seen since 1986.

To the extent that bonds are in control here, Morgan Stanley thinks flaky market conditions could be playing a role:

The dollar has further upside potential from here, gathering support from sharply widening interest rate and yield differentials.

Over the past couple of weeks, the rise in real yields has put high-yielding FX under selling pressure. However, the real yield increase has been due to ‘technicals’ more than anything else. Regulated banks with now-downsized trading books no longer act as a buffer within markets in liquidation mode. The discrepancy between global debt-related security holdings and market liquidity is wide, suggesting the possibility of a wave of bond liquidation leading to higher real yields. Certainly, a liquidation-related rise in real yields is a risk, but we doubt that real rates rising too much would be in the Fed’s interest.

(Chart: Bloomberg.)