When I am out for my morning run, it is usually quiet without much activity. Today I came to an intersection & a car waved me on. This time tho, there was a car coming the other way which

started to go & then stopped. A biker was there & started to go but then stopped. It became a bit of a stand-off of who would out-polite the other person until finally the biker & I went & the cars could go. One action led to a bit of a domino effect of other actions (that was probably pretty comical to watch from a distance).

We have that same sort of chain reaction happening right now in the mkts. The dollar is in the news. In my time in FX, I always found FX to be a derivative mkt i.e. money is not flowing from country to country because of views on the dollar, but the flows from place to place impact the direction of the dollar. Yes, there are hedging decisions on the view but not the main investment call. Right now, that call is to flow into the US.

What is causing this? On the chart today, I look at the US 2 yr yield in orange as a proxy for the terminal Fed Funds Rate. This is moving higher again this morning as Fed watchers are suggesting 75 bps at the next mtg, something that should not be surprising given the

ISM & jobs numbers we have seen. However, this increases the cost of capital & not just in the US. There are many global issuers of dollar-denominated debt for example commodity producers whose revenues are in dollars or Chinese companies who issued in Hong Kong in dollars to get a lower rate. By some estimates, there are over $12 trillion in debt issued outside the US. The move higher in short rates by the Fed is having repercussions abroad.

In times of global risk, investors prefer the US. The S&P is constructed with more defensive

names than many major indices in other countries. It is the safe haven for those that need to stay invested. US Treasuries similarly are a safe haven in the bond mkt. We can see in purple the outperformance of SPX over the MSCI World and in yellow the outperformance of Bonds over JGBS (the other reserve ccy). Both are tracking higher as the cost of capital and terminal Funds rate moves higher.

This in turn is taking the Dollar Index in blue higher with it. If you squint closely, you can

see that the dollar is following these flows and not leading these flows. However, the decisions by the Fed, which will be mirrored in many other countries that are essentially dollarized. The Fed move is leading to a domino effect in the mkts.

It is hard for US based investors to see this because it also means SPX & Treasuries are

going lower, just not as much. However, this may help explain some consternation others have about who is possibly buying this mkt right now. Sometimes it is better to have a bit more of a view from a distance than be caught in the middle of the chain reaction.

Stay Vigilant