Author: Steve Tee
Powell’s hawkish testimony on Tuesday is not surprising at all, causing markets to tank against the US Dollar. Interest rate hikes are here to stay and rumors of a pivot is a far reach now. Again, US Dollar’s rally seems like a bear market rally because one can only be suspicious to how investors are flocking into US denominated investments when the US economy as a whole is about to implode. The 1 year and 2 year Treasury Bond yields are now above 5% and 10 year Treasury Bond stagnating at 4%, causing yield curve to invert further. Technically, when bond yields are high, it is bullish for the US Dollar.
The confidence of investors when investing in an instrument such as US bonds will very much be dependent upon the US economy. The debt ceiling issue is still not resolved yet and if this delays on, US government may have a problem honoring their repayment obligations and that usually leads to default. Let’s imagine a similar scenario at a smaller scale to illustrate this situation. Say David wants to loan money for personal reasons and he approaches Melissa. David promises Melissa that he needs $100 and will pay back in 1 month’s plus 5% interest. Melissa then does her due diligence on David’s background and capabilities to deliver his promise. Melissa found out that David is currently heavily in debt, credit card, mortgage loan etc. David is working part-time at a convenience store. What is the possibility of Melissa lending money to David? If you are Melissa, will you loan money to David? How much trust and confidence will you have on David to fulfill his promise?
That is why US Dollar’s rally is likely a bear market rally. In such situation, many investors would want to diversify away from the Dollar system e.g. cryptocurrency and precious metal such as gold/silver. One of US banks namely Silvergate Bank, on brink of collapse after US$1 Billion loss, reported by News.Com.Au few days ago. Seems that this bank has a lot of dealings with the scandal-ridden FTX, reported by The Verge. Last week we see the second largest bank in Switzerland, namely Credit Suisse suffered monstrous losses and is in crisis. One by one, the banking system is collapsing.