By Michael O’Neill
“It a mixed-up, muddled-up, shook-up, world”, and I’m not singing about Lola.
President Biden announced he would seek re-election. If he wins, he will be 82 years old, which is 28-years older than the average age of US presidents since George Washington ruled the country from New York city. Donald Trump is not much of an upgrade. He will be 78. Both men are so old, that they are in a new class of medicine known as Jurrasic-atrics.
If either man wins, the famous Rose Garden will be renamed Jurassic Park, with appropriate royalties going to Steven Spielberg.
Trump and Biden have been around for thirteen different recessions and likely to be around for one more.
Two weeks ago, the Conference Board pegged the probability of a US recession occurring in the next 12 months at 99.0%. They expect US growth to contract for the next three quarters with recession risks exacerbated by Fed rate hikes and tightening monetary policy.
Source: Conference Board
That forecast was in the wake of the Silicon Valley Bank, Signature Bank, and Silvergate Bank collapses. Depositors feared other regional banks had similar vulnerabilities and rushed to withdraw their funds.
A full-blow banking crisis was averted when the Fed and Treasury guaranteed deposits resulting in many analysts believing the US banking crisis was in the rear-view mirror.
It may not be.
On April 23, Republic Bank disclosed that its deposits plunged by 58% to $102 billion from the beginning of the year. Shares in the company (FRC: Nasdaq) traded hands at $123.50 on March 1 and $5.42 on April 26.Obviously, some people do not think the banking crisis is over.
And if the banking crisis isn’t over the risk of a US recession increases. Economists at the Fed think so. The minutes from the March 22 meeting said that Staff are projecting a mild recession starting later this year with a recovery occurring over the subsequent two-years.
The Fed’s widely expected 25 bp rate hike on May 2, is anticipated to be its last for this cycle. The first-rate cut is projected in September, which is about when Fed staff expect a recession to begin.
A US recession is traditionally not good for the US dollar and the ghouls have already gassed up the hearse.
One of the reasons the US dollar declines is due to Fed monetary policy actions. And this time will be no different. The FOMC will be forced to cut interest rates to support the economy at the same time the European Central Bank, the Bank of Japan, and to a lesser extent, the Bank of England, continue to tighten policy to deal with stick inflation.
Recession fears stoked hyperbolic headlines like “king dollar de-throned” and “US dollar could lose its world dominance.”
CNBC reported that a slew of countries, including Brazil, China, ASEAN nations and the United Arab Emirates are tired of the US dollars dominance. Brazil and China are dropping the use of the greenback for bi-lateral trade, China and Russia are accepting rubles and renminbi. In addition, Brazil and Argentina are making plans for a Latin American currency.
Russia is shunning the US dollar because American and G-10 authorities won’t let Moscow use greenbacks for anything. President Putin and his minions are pariahs in Europe and the developed world. Even Xi Jinping can see the folly in Beijing amassing a horde of rubles, which could end up making Iranian rials look like a good deal (1 USD =514,000 IRR).
China wants to think it is ready for prime time. It’s not. Its currency is stuck in a pre-Bretton Woods era with its value dictated by faceless mandarins in Beijing. How does one trade a currency when the government can send you to jail if it doesn’t like your position?
French President Emmanuel Macron attempted to curry favour with Xi Jinping by suggesting Europe needed to reduce its dependence on the “extraterritoriality of the US dollar.” It’s a great plan but how does he plan to pay for all the US weapons he will need when Russia, with China’s blessing, expands its territorial claims to include all the former USSR nations. The US is unlikely to be very eager to issue to credit to a nation with France’s world war record.
Banking on the dollar’s demise is folly. What else can it be? What developed market central bank would want to hold reserves in countries that aspire to achieve third world status?
The long -term US dollar index chart (monthly) suggests that the drop from 114.00 in September 2022 is going to meet support in the 100.00-100.50 area and the retreat is merely a correction while prices are above 93.00.
If a US recession occurs and the US dollar slides, the Canadian dollar may follow suit. That’s because a Canadian recession is just as likely as America is Canada largest trade partner.
The Bank of Canada has already paused rate hikes and expects inflation to fall to 3.0% by the summer. Royal Bank of Canada is one of the banks that expects a recession, albeit a mild one, in the second half of this year.
The Kinks got it right; it truly is a Lola -world.
Chart: US dollar Index monthly
Source: Saxo Bank