Is the dollar always a safe haven? No

 

The dollar is not always the safe haven that investors would like. This should concern investors, especially since foreign capital flows are moving into equities. The safety issue of the dollar was well described by Andrew Hauser in "On the safe haven status of the US dollar".  Macro investors should focus not on the current dollar move but on what may happen in the next crisis, likely when equities turn down.

The "profit dollar" period is here

As Brad Setser has painstakingly demonstrated we live in a world of de-reservification not de-dollarization. Net claims on the US are accumulated by way of state banks, pension funds, and other quasi-sovereign investors. Meanwhile in value terms, the growth in foreign holdings of US assets is increasingly dominated by equities rather than US Treasury bonds. The dollar today functions far less as a piggy-bank, rainy-day “reserve” currency and more as a vehicle for financial capital accumulation. Some call it a “portfolio currency”. I have dubbed our current era, the era of the "profit dollar".

-Adam Tooze 

This is an interesting assessment of the current dollar regime. We are not seeing investors hold dollars as a safe asset but as a place to invest for profit. Return opportunities are high, so market flows have gone into the dollar and then into equity markets. 

The next part of this process is the great concern. What happens if equity returns decline? Will the foreign investors move from equities to Treasury bonds, or will the money move offshore? Some capital will likely move into Treasuries as a safe asset, but we’ll likely see money move into other safe havens, which will cause the dollar to decline. No dollar safety. 

Trends in sentiment matter

 

The paper "Interpretable machine learning for macro alpha: A news sentiment case study" uses the Global Database of Events, Language and Tone (GDELT) with FinBERT, a bidirectional encoder representation from Transformers (BERT), to construct daily sentiment indices that incorporate time dispersion and event impacts. These indices are compared using an XGBoost classifier against logistic regression to predict major currency and bond futures. The study finds that sentiment trends are also useful for predicting asset returns, as shown by Shapley Additive Explanations (SHAP). Domain-specific natural language processing with interpretable ML can add value to any market model and generate macro alpha.   

Asset managers starting to get long

 

What are fixed income managers thinking about the direction of rates? Look at their revealed preferences based on their position taking. We can measure their exposure to bond futures, both long and short, to see how their net exposure is changing. Short exposures have increased, but that gain is much smaller than the increase in long exposure since mid-August. Short positions have increased by $100 billion, while long exposure has increased by $150 billion. This may not seem like much, but consider that expectations in the press are very negative. Note that asset managers, including mutual funds, may be responding to asset flows.