The dollar is not what it used to be.

A specific example: the correlation to oil...

(short THREAD)
There used to be many arguments why the dollar was NEGATIVELY correlated to oil

1/ The US is more energy intensive
2/ Petro-dollar flow supports other currencies
3/ Other central banks are more sensitive to headline inflation (=energy) than the Fed
And this is how it looked like pre-GFC, EURUSD and oil prices looked nearly identical on the chart (I have admittedly picked the most extreme period, around 2007).

In other words, the USD used to be strongly negatively correlated to oil prices.
But a lot of things have changed since then:

First, the ECB has learnt to care much less about headline inflation (it simply wants to get inflation higher, to get rid of the undershooting)

Second, the US has become a big energy producer, and the deficit on the commodity balance has been erased (it was huge back in 2006-2008 when oil prices were spiking)
And now the EURUSD vs Oil picture looks the opposite of back in 2007. EURUSD has collapsed, while oil prices have spiked.

In other words, the dollar is strongly POSITIVELY correlated to oil prices.
Obviously, there is more than one dollar (and USDCAD has not moved the same way as USD vs EUR). But EURUSD is still the most important FX rate (and EURUSD drags all other European currencies with it, and some EMs too)
And this is the point, when I am ready for a number of 'fancy' econometric feedback.

So to complement the simple charts, here is the oil coefficient for USDvsEUR in a multivariate @ExanteData regression (and yes, it is done in changes to avoid spurious stuff)

Turning positive!
I will leave it at that. The dollar is not what it used to be. And the oil correlation is one thing that has changed. And it matters for trading.


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More from @jnordvig

6 Oct
Is it a coincidence that bitcoin has broken $50K at the same time as the news media is full of stories about a potential US default as a function of failure to raise the debt ceiling in October?

The chart shows that $BTC (white) spiked exactly as US T-bill yields (yellow) spiked
That is, bitcoin prices moved sharply higher exactly at the same time as short-dated T-bill yields (those maturing after October 18, when Yellen has said Treasury funds will run out) spiked, and embedding a 'default premium'
We cannot prove anything statistically in a sample of one, and if we look at how the dollar is trading, we do not have a global USD decline (the dollar has generally been firm in recent weeks), so it is not a slam-dunk conclusion.
Read 9 tweets
3 Oct
It did a purely anecdotal thread on inflation yesterday, just to illustrate basic aspects of 'inflation psychology'

I got some pushback, so I will add a bit more color. WHAT IS DIFFERENT ABOUT INFLATION IN 2021

First, I am not a person who always worry about inflation. I have been observing how central banks in the period 2008-2019 persistently OVERestimated inflation. Hence, I am always skeptical when I see a confidently aggressive inflation forecast.
Second, the link between money supply and inflation is very far from simple, even if some textbooks (and many observers) pretend it is simple. It is not the money supply growth that is fundamentally new in 2021.

I wrote about that in December 2020...…
Read 20 tweets
2 Oct
I run a business @ExanteData. I have always been thinking of the price of our product/service as only a function of its quality.

But now, as some our our cost rise rapidly (heath care up >10%, IT equipment > 30%), I start thinking that there has to be a cost adjustment too.
It is just an anecdote. But when the supply chain issues and other cost pressure are so broad and long-lasting, it is not crazy to think that there will he 2nd and 3rd round effects from the inflation we observe now.
My inflation expectations have been (in my head) rounding to roughly zero for the last five years. It has not been a feature of my price setting. And now I am observing stuff that makes me think differently about cost, and appropriate pricing.
Read 4 tweets
25 Sep
Last week was a serious one. Today, I will try to go in the other direction.

This is partly because a FinTwit guy (see proof below) just said I have ‘humor’ & because I hope to make the next @donnelly_brent top 10 list for funny twitter people.

I may be joking about all this, maybe not (your call)

Economists being funny is all about managing expectations, and I am certainly not joking about that.

I will tell you one brief anecdote, and you will see what I mean.

Here we go...
1/ Some years ago, I went to one of those formal lunches at the Harvard Club (the one in the middle of Manhattan). Lots of mahogany, butler-like staff, and the invited group was sitting around a rectangular table in one of the private dining rooms upstairs.
Read 12 tweets
23 Sep
I had been planning to do a daily China thread this week. But things got a little busy, so I am behind schedule. In any case, here are some observations on why the Renminbi (CNY) is so stable, despite the risk aversion around Evergrande...
Let us start with a recap:

white line is usdcnh (the cnh is holding at around the strongest level since 2018 [low is strong])

yellow line is CNY vs basket (the CNY is strong on a broad basis, around a 5y high [high is strong on this metric]
Hence, while many Chinese assets (from real estate credit to tech equities) have been on the back foot, the currency has been stable, or even strengthening.
Read 18 tweets
20 Sep
Just a few more observations on Evergrande/China Contagion.

Last week, saw the Evergrande tension spreading through the real estate sector (but not much beyond, except Iron ore)

This week, there is already broader based pain...
1/ Today, we have seen Chinese financials are under pressure (in stock space, down >4%

Regional banks down >5% on the day (not shown in table)

2/ global spill-overs are accelerating

Iron ore down another 5%
Aussie stocks down >2%, with materials leading the move down (-3.7%, given the china link there)
Read 9 tweets

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