03 SEP 2013 18:18 EDT
By eFXnews.com
Global USD liquidity has significantly declined, according to Morgan Stanley's calculations.
"We define global USD liquidity by taking narrow US money supply and adding currency reserves. The growth rate of this liquidity indicator has declined by a magnitude not seen since the mid-90s, when financial market were challenged by breaking correlations and a redistribution of flows out of EM back into DM," MS clarifies.
This decline in global USD liquidity can be accounted for several reasons as outlined by MS:
"First, the rebalancing global economy has reduced current account surpluses and deficits, decreasing the amount of USD being circulated throughout the global economy. Second, after years of monetary expansion, some central banks are considering removing accommodation. The most important of these is obviously the Fed, given the reserve status of the USD," MS adds.
So, what does this mean for the USD?
"When USD liquidity declines, the USD tends to rally especially against higher-risk / higher-return currencies often found in the emerging market..We expect the USD to catch up against G-10 currencies, and safe-haven currencies to especially come under pressure," MS answers.
"We define global USD liquidity by taking narrow US money supply and adding currency reserves. The growth rate of this liquidity indicator has declined by a magnitude not seen since the mid-90s, when financial market were challenged by breaking correlations and a redistribution of flows out of EM back into DM," MS clarifies.
This decline in global USD liquidity can be accounted for several reasons as outlined by MS:
"First, the rebalancing global economy has reduced current account surpluses and deficits, decreasing the amount of USD being circulated throughout the global economy. Second, after years of monetary expansion, some central banks are considering removing accommodation. The most important of these is obviously the Fed, given the reserve status of the USD," MS adds.
So, what does this mean for the USD?
"When USD liquidity declines, the USD tends to rally especially against higher-risk / higher-return currencies often found in the emerging market..We expect the USD to catch up against G-10 currencies, and safe-haven currencies to especially come under pressure," MS answers.
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