In the last few weeks there has been a prominent voice siding with more radical interpretations of the status and path that the global economy is on. Claiming the beginning of the Dollar’s debasement, it is the voice of Goldman Sachs that now brings the market a stark warning about government debt and tech valuations. The paradigm of a strengthening US Dollar, falling global bond yields and soaring tech valuations has been with us for at least a decade, many would argue closer to two. To publish attacks on all three of these phenomena within the space of a week signals to the market Goldman’s belief in a fundamental shift in the global political economy.
The call of a debasing US Dollar from the leading investment bank goes further than many market participants’ belief of a shift in sentiment against the greenback and a move away from risk. Debasement occurs when an asset or entity changes so significantly that it’s very fundamentals are incomparable over two time horizons. In Goldman’s opinion, economic fundamentals, political uncertainty and the pandemic response measures thus far create a significant disturbance to the drivers of the US currency so as to warrant a complete reclassification of its strength and even position in the world. There are relatively few market participants persuaded by the debasement story so far.
During the course of the pandemic central bank balance sheets have been raised by 20% to 120% of GDP in Japan, increased by half to 60% in the Eurozone, and expanded by $3tn in the United States. The vast amount of new liquidity in markets has driven yields lower as the central bank has soaked up any excess supply of government debt not purchased in the open market. Goldman warned yesterday in a note that the early discovery of a coronavirus vaccine could force a cyclical rotation from government debt into more risky assets. The bank suggested that the risk of discovering and approving a vaccine this year has not been priced into the market sufficiently. If this event did materialise the bank suggests it would be sufficient to question assumptions about eternally negative real rates.
Over in the United Kingdom this morning the Bank of England convened early to publish their latest monetary policy decision. They kept rates on hold and the pace and scale of the asset purchase program unchanged in line with market’s consensus expectation. The BoE did concede that the economy may not return to pre-pandemic levels until the end of 2021. The issue of negative nominal yields as part of the BoE’s toolkit was sidelined encouraging a positive momentum behind the Pound this morning.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Overrated Rates
Charles Porter
Tue 1 Oct 2024
Overrated Rates The unwinding of USD implied short term interest rates shouldn’t be underestimated. Take a brief look at changes in FX swap pricing over the past few months and you’ll see just how significant those interest rate expectations have proved to be. Particularly within GBPUSD, the difference is enormous. Post-pandemic inflationary pressures affected the […]
Daily Brief – Bank of England
Humphrey Percy
Fri 4 Oct 2024
Bank of England In an interview with the Guardian newspaper, Governor Bailey made it clear that Central Banks could afford to cut interest rates more sharply. Markets correctly interpreted that statement as him preparing the way for cuts at pretty much every Bank of England MPC meeting for the next 6 months until they reach […]
Daily Brief – Fifty Up
Humphrey Percy
Wed 2 Oct 2024
Fifty Up Exactly 50 years ago today I set out on my career in the City of London. Many of the men whom I worked with wore bowler hats and smoked pipes. Discount House men wore morning dress and top hats. Everyone wore two or three piece suits and black shoes. If you wore brown […]
