Over the weekend, we showed why according to Macquarie strategist Viktor Shvets, the “biggest risk facing investors over the next 12 months” was an intense appreciation in the US dollar. The key reason behind the thesis was simple: a sharp reduction in dollar supply has been observed as the Fed destroys liquidity by shrinking its balance sheet resulting in a contracting US monetary base, coupled with the seeming inability of the US to significantly widen its CA deficits (despite public sector dis-saving).

This was shown in the chart below:

Now, in a strategy note sent to us  by Neels Heyneke and Mehul Daya of South Africa's Nedbank, the analysts reach the same conclusion as Shvets, claiming that we are now entering “the beginning of a prolonged risk-off phase as global dollar liquidity has started losing momentum.”

Just like for Macquarie, Nedbank agrees that “it's all about the dollar”, explaining that there is nothing more important than “getting the dollar right.” Here's why:

The US dollar is still the dominant global currency, and a stronger dollar is an indication of tighter global financial conditions.

If this is the case now again, and we believe it is, then we can expect real rates (term/risk premium) to rise, which would be negative for risk assets. The tighter financial conditions would also be deflationary by nature.

We therefore expect the US10yr to rally (continuation of the 30yr bull trend), reflecting the deflationary forces of a stronger dollar and contraction in the Global $-Lliquidity – this would not bode well for risk-assets (like SA bonds/FX /equities).

One can see why Nedbank is concerned with its version of a chart we first presented three months ago:

Meanwhile, once again echoing Macquarie, Nedbank then points out that its own global $-Liquidity indicator has been losing momentum “due to the tightening monetary conditions by the US federal reserve (and as US current deficit shrinks)”, the same reasons highlighted by Shvets previously, and largely repeating the same warning as we noted before, Heyneke writes that as “dollar liquidity slows down, it is likely to unwind the extreme positioning and enforce a strong dollar (ie de-risking).”