Dollar liquidity measures the ability of the dollar to be used for transactions and activate other forms of financial assets. Currently, this presents a confusing situation for investors. Let’s take a closer look
Curiously, at the end of March the volume of reverse REPOs for non-residents halved
But foreign companies have increased loans, and quite aggressively
This could indicate a shortage of dollars outside the U.S. financial system.
Fed’s balance sheet shrank by $17 billion in the week, a steady trend relative to last year
The blue line is the annual dynamics of the Fed balance sheet, the green and red are the mortgage bonds and treasuries on the Fed balance sheet. As we can see, all indicators are below zero, i.e. below last year.
The Ministry of Finance account decreased by $54 billion, with about $80 billion remaining in the account of the Ministry of Finance, which is a historically low value – this is marked by the blue line on the chart
The red line is non-resident reverse repos, which rose by $12 billion during the week and returned to historic highs.
Excess reserves that are not generating income (blue) are down $34 billion and those that are generating income (red) are up $78 billion,
The growth of reverse repos continues to generate losses for the Fed, with $48 billion in losses already accumulated.
Liquidity in the system decreased by $40 billion (blue line) due to absorption from reverse repos, and also in a sideways trend after the start of the banking crisis
The U.S. stock market (the red one is the S&P500) has gotten off the ground, and the accumulated divergence is quite significant.
According to the Federal Reserve Bank of Chicago, credit conditions have begun to tighten (blue line), but for some reason the dollar is not feeling it and continues to weaken (red line is the annual trend of the dollar) – suggesting that the dollar market is “long-covered” before rising.
FOREIGN EXCHANGE BALANCES
U.S. financial system currency balances are unchanged for the week (blue line), remain at the levels of the beginning of the year
The red line is a reversal of the dollar, last week’s data, but we know that the dollar has remained under pressure this week, which locally does not fit with the dynamics of the volume of currency balances.
1) The picture with the dollar is interesting: increased demand from non-residents in two of the three considered directions, as well as flat dynamics of currency balances and reduced liquidity, combined with tightening credit conditions – suggesting that the current dollar decline is the final one before the start of growth.
2) The Treasury bill also looks curious, and if tax revenues are lower than expected because of lower corporate earnings, everybody will be talking about a liquidity shortage at one of the guarantors of stability in the U.S. financial system.
3) There is also an expressive divergence accumulated between the S&P500 index and the volume of free liquidity in the system, which can be interpreted as potential pressure on the stock market, especially since the cycle of liquidity withdrawal by the Ministry of Finance is ahead, i.e. the liquidity indicator will start to decline steadily.
4) I continue to believe that a new risk-off wave is coming, which will be heavier relative to the spring 2022 wave, which will end in the summer with a move to control the yield curve or lower rates, I am leaning towards the first instrument. @ESG_Stock_Market