Thursday, September 17, 2009

The Debts of the Spenders: German Government Bets on Dollar's Decline

*UPDATE - In fact, the German government is so confident in its success that it is strongly considering ANOTHER dollar denominated bond sale. Like most fiscal authorities, the German spokesman did not want to commit to anything on the record but hinted heavily at the future course of action:

I do not follow Elliot Wave theory at all. But I received this interesting note from a reader:

""Germany Plans First Sale of Dollar Bonds Since 2005," said a Sept.10 headline.

[Germany] is betting on the dollar's continued decline. They hope that when these dollar-denominated bonds mature, they will pay back in dollars worth less then when they borrow. But this is precisely the wrong moment to do it, because everyone is on the bearish dollar bandwagon right now.

Basically, what the EW'ers are saying is that this is a contrarian sign - a signal of a bottoming out process. But let us ignore the EW'er track record for now (which like all Technical Analysis has a mixed record).

Instead, consider the following facts: (1) this is a decision by a G20 government actor; (2) the G20 just met 2 weeks ago to hash out global fund flows; (3) Central banks have already flooded the world with [dollar] liquidity.

At the end of August, I posted about the new dollar carry trade:

In the article, I posted the implications behind the dollar-yen pair off. Basically, the dollar has supplanted the yen to become the new financing vehicle of equity traders and bond funds. Moreover, while sideline money (a theory that many EW'ers dismiss) may not necessarily be flowing into equities, a large amount is flowing into bond funds.

The significance of this is not to be missed. The Germans are obviously trying to tap into the [still deep] pockets of US fund managers - many of whom BY LAW - are required to invest in dollar denominated assets in order to meet their conservative mandates. A dollar denominated bond sale would reduce their foreign currency risk while still giving them access to foreign markets. A nice arbitrage play - and it could work out very well.

For more info about sideline money and bond funds, read this excellent post:

*Disclosure, I am short the dollar.
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