Tuesday, October 29, 2019

Scary Halloween story: How a weak USD could hand China a major victory

I have written before how a strong USD can be a negative for global financial stability. There are  many EM borrowers who have borrowed in the offshore USD market, and a rising USD puts a strain on their finances.

In addition, FactSet reported that companies with foreign domestic exposure have exhibited worse sales growth than companies with domestic exposure.

The USD Index staged an upside breakout out of a multi-year cup and saucer pattern with bullish implications, which was bearish for global risk appetite. More recently, it fell below the breakout line, which should be bullish for global assets. Indeed, the bottom panel shows that the relative performance of EM stocks is making a broad based bottom, just as the USD weakened.

Here is the scary Halloween story to be told around the campfire. A falling USD has the potential to hand China a major geopolitical victory without firing a single shot. In the ancient text, The Art of War, Sun Tzu wrote that a general could win by arraying his forces to exploit his enemy`s weaknesses. That way, he can achieve victory without bloodshed if it becomes evident that the enemy will collapse before any fighting begins.

Here is a little known but glaring weakness that Beijing could exploit.

The full post can be found here.

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