The USD could quite possibly decide the fate of capital markets. For almost a decade and a half, global rates have been very low. The primary engine of growth has been cheap money and central banks, primarily the ones in developed nations, have kept highly accommodative conditions for a very long time. This has led to a very large accumulation of global debt, and the instrument of choice is the good ol’ United States Dollar (USD).
To understand the magnitude of this global debt saturation we have to look at the EURODOLLAR market and its extraordinary broadness. Eurodollars refers to US dollar-denominated deposits at foreign banks or at overseas branches of American banks. The most interesting feature is the deposits are held off-shore, so it is not subject to US banking regulation. The Federal Reserve Board has no jurisdiction over that whole, enormous market.
So what happens when a government or a large multinational firm decides to raise capital for its financing needs? These entities can borrow in USD from off-shore balance sheets, and they do. When they do such a thing, the debt they issue (bonds) earns interest in dollars and has to be repaid in dollars. The Eurodollar system is the biggest source of global funding, and since it is part of an unregulated financing system with thousands of global participants, it is very difficult to accurately gauge its size. What this boils down to is that it is a consistent source of USD demand, in essence the market is ALWAYS SHORT USD.
Now to the Chart: Monthly Chart of the DXY shows we are close to an inflection point.
BCM Partners looks for set-ups that have defined risk, where we can risk 1 unit to make 3 back. This simplistic approach is made possible by our ability to read charts. Technical analysis is the cornerstone of our strategy. Charts, price action and investor behavior, is, for all intents and purposes, the truth we seek.
Our thesis is that the market is near a large inflection point with the USD shortage. Covid-19 has exposed the vulnerabilities of the EURODOLLAR market and the potential it has to unravel. The FED will take measures, its actions when the crisis hit were swift and to the point (global swap lines), but the magnitude of this short is unprecedented. That, combined with the current level of the USD has prompted us to look for LONG USD trades.
We feel the moment is nearing, we remain extremely vigilant and continue to break down USD charts. We are getting close to a big inflection point.
Oscar G. Salem
Founder, Managing Partner
BCM Partners, LLC