A weak dollar and artificial growth, Until when?

The American economy has grown strongly and practically without rest since the crisis of 2008, where the S&P has increased its value by 278% in just over 10 years. To obtain this growth, the FED implemented a new series of monetary policy tools, such as “quantitative easing” and “repurchase agreements”, which along with interest rates, caused an expansion in the economy.

In December 2015 and after approximately 7 years of flat interest rates close to 0, the FED begins to raise them in a phased manner in order to compensate for the rise in inflation from approximately 0.5 to 2% between the end of 2010 and early 2012, which remained oscillating in a range of 1.5 to 2.4%. But something curious happened about September 2018, when the FED intended to tighten its expansive monetary policy, realized that the American economy was in the direction of growth. Investors got into a panic and the indexes plummeted in the following 3 months.

Tipos de Interés e Inflación subyacente

The lowering of interest rates has allowed the economy to expand, reacting in a contrary way when this rise. In the chart below we can see how the decline in rates since 1980 has allowed this growth in the Dow Jones, with 2 key moments, 2000 and 2008 where you see failed attempts to raise the rates that trigger stagnation first and then crash. The Trump era brought more increases in the types along with a fiscal reform, which has acted as a buffer to the first attempt to tighten monetary policy, but that is not enough to encourage economic growth.

Tipos de Interés e Inflación subyacente historico

Tipos de Interés e Inflación subyacente en los últimos 10 años

Thanks to economic growth, the labor market was strengthened, with the unemployment rate reaching a minimum of 45 years and showing a negative correlation with the index over the last 10 years.

Tasa de desempleo historica
Correlacion negativa entre la tasa de desempleo y el Dow Jones

Why did the market react in this way when the value of the dollar was ready to rise due to an increase in the rates and a change of tone in monetary policy? Not everything that glitters is gold, and this may be the case. The American citizen has lost purchasing power in the last year, where wages have fallen and the CPI has risen, increasing the risk of default and retracting consumption, something that is reflected in the sharp fall in retail sales. The trade balance increasingly negative and growing debt.

Crecimiento Salarial e IPC
Ventas minoristas

The investor sentiment turned negative and catastrophic, at the moment in which the FED was preparing to apply a contractive monetary policy, something that is reflected in the curve of the interest rates of the bonds. The interest rates in a normal curve increase the longer the life of the bond, so you get more return with a 10-year bond than with a 2-year bond. But what happens when this logic is broken, and the interest rate of the 2-year bond is higher than the 10-year bond? The emotional state of the market reflects a possible crisis in the short term. And this is what is happening now.

Curva de tipos invertida en el corto plazo

The curve is not completely inverted, but it is very close to obtaining negative values ​​in the difference between the 10-year and 2-year type, reflected in the graph below. The difference has turned negative before recessions since 1980, giving this indicator significant reliability. This is warning us of something, that the growth of the economy has been generated from debt, a debt that does not stop growing, and where the bonds do not stop issuing, under the premise that the central bank can pay debt with more debt. That is why, faced with the attempt to raise interest rates and tighten monetary policy, the market panics, due to the simple fact that the debt can not be paid.

Diferencia entre los tipos de los bonos de 10 y 2 años

Both, the issuance and outstanding bonds are on the rise since 1996, according to the data extracted from “Sifma”. The slope observed in the outstanding bonds is much more pronounced than that existing in the issuance, where you can see a correction prior to the 2008 crisis, something that does not happen with the first one.

Emisiones en el mercado de bonos
Bonos pendientes de pago

This directly affects the value of the American currency, the FED needs to maintain a weak dollar in order to do not trigger a new recession and the bursting of a large bubble. If we analyze the movements and behavior of its main peers, EURUSD and GBPUSD, both are in areas of uncertainty or non-trend in the long term, but with certain behaviors that can help us determine what is more likely to happen with the US dollar.

EURUSD escala mensual

Since December 2014 the Euro is oscillating in a range of 1.04 to 1.25, where global uncertainty flood markets with Brexit, the trade war, political instability, and more. But the active sequences, marked in the orange graph, show a connection in length, time, and speed, which increases the probability, if prices react upwards from this zone, to see new maximums towards the first blue attractor, located between 1.30 to 1.39. First, the price action has to come out of what we call a non-trend zone, between 1.0871 and 1.2034, and this has to be accompanied by an increase in the presence of bullish sentiment in the structure, which at this moment is balanced in the 3 blocks analyzed, persistence, distribution, and speed. Where the persistence is displaced towards the bearish zone, the distribution of the movements towards the bullish zone, and the speed oscillating around 0 without a defined trend.

Análisis de persistencia, distribución y velocidad

If we see the spectrum of movement there is a slight imbalance towards the downside, where, if the fractal seeks equilibrium, as is its usual behavior, we could see an increase in bullish movements.

Espectro de movimiento del par EURUSD escala mensual

The GBPUSD presents a similar performance on the monthly scale, where the price is in an area of ​​uncertainty, contained in a range since June 2016. The highest-grade sequences are in a position where it can be considered finished, but for this, further confirmation is necessary, with the exit of the price out of this zone and completing a possible incomplete bullish construction in its iteration.

GBPUSD escala mensual

In the “analysis of the 3 factors”, as we usually call it in our algorithm, the sentiment is shifted to the downside, where the impact of Brexit still has memory, not only reflected in the persistence, but also in the distribution and speed. The spectrum of movement shows us something similar, an imbalance towards the down caused by Brexit, where you can also see a slight negative slope.

Espectro de movimiento del par GBPUSD escala mensual
Análisis de persistencia, distribución y velocidad

We can conclude due to the current macroeconomic environment in the United States and the need for an expansive monetary policy supporting the artificial growth generated from the debt, to avoid a crash coming from a bursting bubble, and how the fractal structures for the EURUSD and GBPUSD were built, the American currency would depreciate against its two most powerful European counterparts in the European community, something that would be confirmed with the price moving outside the uncertainty areas.

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