One of the more interesting things to have occurred during the “hidden holiday season” has been the behaviour of the trade weighted US$, which has just completed a 23.6% fibonacci retracement of its rally from the February 2018 lows and, more importantly, has broken the long term support levels that have been in place for 18 months. The next level of support is back at the January 2019 lows.
While this is not necessarily a meaningful move per se, it could nevertheless have some important repercussions. As discussed in an earlier post, the unhedged $ exposures of Taiwan insurance companies via onshore ETFs invested in US corporate bonds could be compromised by $ weakness, leading to some distressed selling – the Taiwan $ has already rallied 5% from its low. More prosaically, but perhaps more significantly, the prospect of a weaker $ could trigger some asset allocation into international (non US) equities in Q1.
In addition to capital flows one feature that could damage the dollar is geo-political uncertainty seen to be driving a de-dollarisation programme. In that context, as we end the year we note that the US has retaliated against an attack in Kirkuk, Iraq which killed a US military contractor with 5 co-ordinated strikes on Kata’ib Hizbullah whom it blames for the attack. The fact that they are only tangentially related to the Iranian Hizbullah and have been actively fighting against ISIS seemed not to matter. Moreover, the fact that the camps were 450 km away from Kirkuk and included the only border crossing between Iraq and Syria not under control of US forces raised more than a few eyebrows to put it mildly. As didi the fact that President Trump was apparently only informed of the attack after the event. This is effectively the US attacking both the Iraqi and the Syrian state. Markets may have become somewhat blasé about this sort of thing, but the tensions continue to build.
