FAST FIVE: The Lubricant Of The Global Financial System Is Not Working Anymore
Slowdown in global trade is putting pressure on creation and velocity of Dollars via value-chains/Dollar-leverage since the Dollar is the lubricant of the global financial system.
Banks raise relatively fewer dollar liabilities in their affiliates in the US since the GFC.
Nedbank's Daya concludes: “The consensus is that should the trade wars accelerate it will be inflationary.
This will favour bonds and other yielding assets over growth assets.” The macroeconomic tailwind arising from the growth in the USD monetary base is under threat, leaving the global economy and financial system vulnerable to tighter financial conditions.
However, we expect central bank balance sheets to become even more important role in the financial landscape to manage the changes in the quantum of USD in the global economy – leaving traditional signals like the yield curve, volatility and IR differentials difficult to interpret compared to previous cycle.