Wednesday, 03 February 2021 / Published in Analysis

I have never subscribed to the theory that interest rate differentials are what determine the value of currencies. Yes, differentials do play a role, but in my opinion a lot less than most people think.

While the yield spread between 10-year US treasuries and 10-year Bunds has increased, this has not stopped the dollar falling almost 10% vs the Euro. Obviously if yield was the main driver of currencies, this should not have happened.

When looking at the current valuation of the dollar, many other factors are in play at the moment, that overshadow yield differentials.

The greatest factor is Inflation tolerance: The Fed has repeated many times that it will tolerate higher inflation for a considerable amount of time, even after the pandemic ends. At the same time, it has also said it will continue to purchase assets for at least the same amount of time.

And contrary to what happened in 2018-2019, when the Fed tried to raise interest rates in order to offset the US government’s increased spending, this time around the Fed will do nothing of the sort, instead opting for continued bond purchases and thus preventing yields from rising.

This will probably create a dilemma for holders of US treasuries. And the dilemma is, will the interest earned compensate for the dollar inflation they will incur. The answer is probably not, which might an additional reason for the correction of the dollar.

Finally, because the fed’s balance sheet is poised to rise for the foreseeable future, in a way this dilutes the value of the dollar a bit. However insofar as the rise of the Euro vs the dollar, please also remember that the US has a twin deficit while the Euro zone a current account surplus.

Friday, 22 January 2021 / Published in Analysis

Cryptocurrency market has witnessed a massive selling pressure in the past few days, with Bitcoin price falling below $29.000 for the first time since Jan. 05, 2021, on growing concerns over regulation attention and a widespread profit-taking after the extraordinary rally.

Regulation attention from US Treasury and ECB:

The recent price rally and enthusiasm in the crypto market have lost some steam after Janet Yellen’s comments, President Joe Biden’s pick to head the US Treasury, during a US Senate hearing on January 19, 2021.

Yellen expressed concerns that cryptocurrencies could be used to finance malign and illegal activities, adding that she is intended to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for Cryptocurrencies and other fintech innovations. That followed a call last week from European Central Bank President Christine Lagarde for global regulation of Cryptocurrencies.

Bitcoin and Ethereum sell-off:

The price of the world’s most popular cryptocurrency initially lost as much as 17% to $28.800 on Thursday night, before bouncing back between $30.000-$32.000 on Friday. Bitcoin is trading 30% below its record high of $42.000 posted at Jan.08, 2021.

Ethereum, the second most valuable digital currency after Bitcoin, dropped even more yesterday, declining 22% toward $1.040, only three days after posting a fresh all-time high at $1.440.

The price of Ethereum, which was founded from the Russian-Canadian programmer Vitaly Buterin back in 2014, entered 2020 at near $120 per coin. The popularity of Bitcoin and the massive inflows from institutional investors have helped Ethereum to post a parabolic rise above $1.000 at the end of 2020.

Rocky start of 2021:

While the 2020 was a great year for Cryptos with lots of bullish developments, tremendous price rallies up to 300%, popularity, and media coverage even as they still have limited real-world usage, however in the first 3 weeks of 2021, the bears have taken control, bringing lots of pressure, huge price swings and volatility.

The recent two-day sell-off wiped out more than $100 billion from the crypto market capitalization, which it now stands at around $900 billion, while the Bitcoin’s dominance rate is 65%.

Wednesday, 13 January 2021 / Published in Analysis

The US dollar has been the top performing currency since last week, gaining support from a spike in US Treasury yields, the Biden’s stimulus agenda, hopes for US economic growth and expectations for higher inflation.

The greenback continues to recover from 3-year lows after the Democratic party won control of the US Senate last week, which propelled expectations for bigger fiscal stimulus packages to shore up the US economy. 

President-elect Joe Biden has promised further pandemic-relief fiscal spending following the disappointing non-farm payrolls for December, financed with more Treasury debt and taxes.

The 10-year Treasury bill crossed the 1.10% yield level for the first time since March, sparking speculation that a long period of interest rate compression could be reversing.

The dollar valuation has improved against major currencies since the US real yields are rising faster than global counterparts together with the shift by the Federal Reserve to allow higher inflation.

The surge in bond yields and market inflation expectations have been enough to pause the bearish bets against the greenback. The dollar index rose near the 91 level, after dropping as low as 89 last week, which was 12% lower from March highs. 

Thursday, 17 December 2020 / Published in Analysis

Bitcoin, which is the flagship cryptocurrency broke above the psychological level of $20.000 on Wednesday for the first time in history. The upside momentum continued also during Thursday’s European trading hours where the price hit a new record high of $23.700.

The pioneer digital currency price has surged by more than 100% since the September lows of $10.000 amid robust demand based on its unique crypto characteristics and the continuing devaluation of the world’s major fiat currencies (especially the US dollar).

Positive long-term fundamentals

The ballistic-style rally was supported by Bitcoin’s positive long-term fundamentals such as its scarcity (the total supply of bitcoins that will ever be “mined” is capped at 21 million) and the devaluation of the US dollar amid the massive monetary policies by the Federal Reserve and other Central banks around the world.

The portfolio managers have started using Bitcoins to diversify-hedge their investment portfolios against market risks and inflation, instead of Gold and inflation-linked Treasuries-Bonds. Bitcoin acts as a “store of value” asset and it is ideal for hedging some of the monetary and fiscal risks.

Hence, the crypto market has seen strong demand from institutional investors who invest billions into digital assets and blockchain technology. Many traditional banks and asset houses such as BBVA in Spain and Fidelity will start using bitcoins in their financial operations. Also, the S&P Dow Jones Indices recently announced plans to launch crypto indices in 2021, while Cboe has tapped New York-based trading software firm Coinroutes’ crypto market data capabilities.

The recent development in the digital markets provides further evidence that the crypto market is transforming from a retail place for speculation into a sophisticated and tech-savvy part of a global financial industry.

Wednesday, 09 December 2020 / Published in Analysis

The global pandemic and the economic shutdowns have been devastating to the travel sectors in 2020, but optimism surrounding vaccine developments has boosted confidence of a smooth economic reopening in 2021.

50% of the global population is expected to receive a vaccine until next May, allowing consumers to travel and gather safely in public spaces, reversing the investing outlook for the travel and tourism sectors.

Industries such as airlines, hotels, leisure, entertainment, tour operators, casino, cruise lines, and restaurants which underperformed during the pandemic, are expected to have a sustainable recovery next year as the virus will be under control. With vaccines on the horizon, investors have already started positioning into travel stocks, with some of them posting their best monthly performance in November since the start of the pandemic.