Euro rise, US Data and Peter Zeihan

We had written yesterday about how an illusion is getting created that the mighty dollar is retreating from the throne of world reserve currency. The argument was that the dollar index is an artificial construct which is heavily skewed towards the Euro by its very nature. So when we say the dollar index is down and in the same statement we add that the Euro is up, we in effect are talking about the two sides of the same coin. But nonetheless, the Euro has scaled new peaks and briefly touched 1.19 in the morning trade today. The Euro rally signifies the relative performance between the two regions. Let us examine that in greater detail based on some data points.

The second quarter US GDP which was released yesterday showed a contraction of 32.9% QOQ compared to the German flash GDP figure of 10.1% contraction. The US continuous jobless claims rose to 17.018 million which was worse than the market expectation. The initial weekly jobless figure came at 1.434 million. The initial claims are the new people who joined the pool of people claiming the jobless benefit in the given week whereas continuous claims signify the people who are out of the job market for a longer period and are dependent on government support. The more than expected rise in both the initial and the continuous claims flies in the face of reopening efforts in the US. The Eurozone on the other hand has seen a period of calmness regarding the new corona cases and the efforts regarding the reopening have been largely on line.

One other news which can have possible ramifications in the coming days was the call by the US President to possibly delay the November presidential election as he expects them to be the “most inaccurate and fraudulent in history”. He wrote on Twitter: “Delay the election until people can properly, securely and safely vote?”. As per the statute, the election dates are set by US congress and enshrined in federal law and hence an act of congress will be required to change them. Hours after the Trump tweet, a number of top Republicans dismissed the idea of election delay. The Dow Jones closed down by 0.85% at the end of the day. The US 10 year yield is trading around 0.53%.

Now lets come back to the most important question again which is with all the Sino US tension, dollar decline, election uncertainty - is the era of the dollar over? One possible line of thought is provided by author Peter Zeihan in his book The Disunited Nations. Peter argues that the world, though it runs on the software of finance, it is ultimately predicated on the hardware of military might. He writes that until there is a complete overhauling of the global hardware which is still essentially US denominated, the software changes will neither be complete nor sufficient.

Domestically, the market will be keenly watching the bond auction today where the new 10 year bond is expected to make its debut. The current 10 year trades at 5.82.