Daily Commentary

MarketMinder’s View: This article argues the strong US dollar is a “significant concern” not only for Emerging Markets (EM), but also developed because depreciating currencies can spur inflation, which could force them to hike rates, weakening their economies. While we agree with the assessment documented here that the dollar is strengthening because US rates are relatively high and many investors expect them to remain that way versus rate cuts anticipated elsewhere, we don’t subscribe to the notion it is necessarily problematic. For one, attitudes could easily shift given rate trajectories aren’t set in stone—and central bankers are notoriously unpredictable. Most glaring, in our view, the article cites Turkey as a victim of dollar strength, but the Turkish lira has fallen for decades against the dollar whether the Fed was hiking or cutting. While it takes two to tango in currency markets, we suspect Turkey’s economic mismanagement is more to blame for its woes than a strong dollar. Second most glaring? The implication that Sri Lanka’s 2022 default was about the strong dollar. For one, it isn’t in EM—it is a Frontier Market. But also, its crisis predated the strong dollar in 2022, as it was largely tied to tourism getting decimated in the pandemic, huge inflation, a lack of foreign currency reserves and a political crisis. Most EM and developed markets don’t face these predicaments. Besides, the reason why many EM got into trouble in the late 1990s wasn’t US dollar strength per se, but because of fixed exchange rates with the dollar they weren’t able to defend. Nowadays, nearly all countries’ currencies float and most EM have ample reserves to back them if deemed necessary. This is why 2022’s dollar strength didn’t cause a vast crisis, despite some fears at the time.

MarketMinder’s View: No, Japan’s exports didn’t “surge” to extend a streak of four straight months of growth. That is only true in value terms—those denominated in yen. That is inflated by the yen’s extreme weakness of late. In volume terms, which the Ministry of Finance reports in the same press release, exports fell -2.1% y/y in March, the second-straight decline after February’s -1.5% and the 9th drop in the last 12 months. While this is a very niche statistic and one that we don’t think reflects sentiment broadly, we see this as a reminder to investors: Make sure you dig into the actual data rather than accept coverage at face value. It could lead you to incorrect conclusions.

MarketMinder’s View: Here is a quick look at ongoing demand for long-term US debt. The Treasury auctioned off $13 billion in 20-year bonds today at a yield of 4.8% with a bid-to-cover ratio of 2.82. As the article notes, “The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold. The ten previous twenty-year bond auctions had an average bid-to-cover ratio of 2.63.” In other words, not only has demand for long-term US debt been consistently well over twice the amount supplied, it appears to have strengthened lately with higher yields. This really shouldn’t be surprising, but we have long seen fears of supply overwhelming demand, sending yields spiking. The evidence here shows, at least thus far, that isn’t happening. For more, please see our October commentary, “Digging Into Bond Demand Fears.”