Germany enters recession, dollar charges back
Crucial chart pack and economic update on US housing, dollar and Chinese yuan, stocks, yields, and bitcoin. All the levels to watch this summer.
Memorial Day is upon us, as are summer getaways, low fixed-income volumes, and the hint of perhaps less market action. This is not always the case, however. Last summer brought the thrills and despairs of exchange collapses, one of bitcoin’s historic price drawdowns, and the best Paul Volcker impersonation my generation has ever seen. What will we see this summer? How about a banking crisis and global recession? In today’s post, I’ll walk you through The Bitcoin Layer’s full summer playbook, including support and resistance levels to watch across rates, stocks, and bitcoin.
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A strengthening dollar is correlated with a weakening global economy
Germany has entered technical recession, but how long will it take for the US to follow?
US housing is resilient, but the marginal activity is weak
Humongous resistance levels in Treasury yields being tested as we speak
Crucial resistance on S&P 500 and where bitcoin must find price support
King Dollar, again
In April, we wondered how the dollar would respond to meeting support around 100 on the Dollar Index (DXY). We now have an answer.
Recently, legendary investor Stanley Druckenmiller divulged a short dollar bias, identifying the horrendous fiscal outlook for the United States over the medium- and long-term. We don’t disagree with Druckenmiller’s assessment of the financials, but from a cyclical perspective, not a secular one, the dollar might achieve strength as a result of the global slowdown regardless of any other force.
Before we look at the dollar’s price action, let’s turn to China. Over the past decade, China’s Xi Jinping has attempted to move his country away from export-dependence and toward stronger consumption and higher value-add contributions to the global economy. He hasn’t explicitly failed, as China does have a larger middle class and is forgoing some industries reliant on the cheapest labor. But it hasn’t succeeded either—with a slowing global economy, China has resorted to devaluing its currency once again to boost competitiveness. This weakening is not necessarily a leading move, but more of a symptom of global demand. A weakening Chinese currency translates to a stronger dollar, and empirically we know that strong dollar regimes correlate with tighter financial conditions and economic activity on a global basis.
Notice the move weaker past 7 (when this chart increases in value, it is the dollar increasing in price versus Chinese yuan). If we interpret this is a symptom of the global economy, we can guess the condition:
This move appears to be a material one, from a policy perspective. China is devaluing—a strong yuan is bad for business, and business being bad is a sign of poor demand from the US. The two are inextricably linked, and that is why it’s so important to incorporate this currency pair into your investment framework. A yuan weakening past 7.25 could coincide with a hard landing of the US economy.
Now Germany, when US?
Germany formally announced its second consecutive quarter of negative real GDP, and thus, entered a technical recession. Germany’s economy, much like China’s, is dependent on global demand for its machinery, medical equipment, and vehicles. Slowing global demand affects Germany, and we see that evidenced now with the lagging data—this means the global economy has been weak for several months, and not a coincidence that the yuan has been weakening since January. When will the US follow?