U.S. Dollar Liquidity Vs. Emerging Markets

When U.S. dollar liquidity goes down, it means that there is a tightening in U.S. dollar funding conditions. This coincides with a negative EUR-USD cross-currency swap basis. 

Dollar borrowing conditions can be improved by implementing quantitative easing (QE). This will depreciate the U.S. dollar. One of the global effects of this is that emerging markets will benefit from this added U.S. dollar liquidity (see chart below).

 

Tightening of liquidity is best seen at the shorter end of the curve. See chart below when Deutsche Bank started to have troubles in September 2016.

As U.S. dollar liquidity tightens in September 2016, I expect that the Federal Reserve will initiate another round of quantitative easing to ward off such U.S. dollar liquidity panic.

CRB Index Vs. Emerging Markets

I talked about how the emerging markets and especially China depend on commodities. If China does well, the commodities will do well. The mining industry (example Australia) will follow this trend. This means that the CRB index is correlated to the emerging markets.

This is illustrated by a nice chart from Ed Yardeni.

Apparently Ed believes the commodity supercycle has reached its end since 2011, contrary to what Peter Schiff believes. I do think that the mining industry had a huge boom since 2000 and is now in the process of unwinding. Commodities have been flat because the U.S. dollar was strong. But I don't think the Western world is in such a good shape as Ed thinks, that's why I think this commodity cycle is not over yet.