Keep pulling the thread on Darius Dale.
A rising U.S. dollar and increasing FX volatility are key drivers that negatively impact global liquidity.
The real 10-year TIPS yield has increased by approximately 50 basis points in the last month, causing damage to liquidity in asset markets.
The global liquidity impulse has been negative for each of the past six months.
Approximately $1.8 to $2 trillion of global liquidity has been lost over the last three months on a momentum basis.
When Asian central banks intervene to support their local currencies against a strong dollar, they sell U.S. Treasury holdings, which can increase U.S. Treasury yields and widen the yield spread, creating a 'doom loop' that necessitates further intervention.
Approximately half of all global dollar-denominated debt is held by entities with no organic access to U.S. dollars, such as Japanese banks or European hedge funds.
Economic intervention from central banks is more likely than currency intervention and could be triggered by a sovereign debt crisis in a core market.
Darius Dale predicts the DXY (U.S. Dollar Index) will break above its October 2022 high of 113, unless a rapid rise forces the Federal Reserve to intervene in asset markets first.
The Federal Reserve is unlikely to reverse the current liquidity drain because underlying inflation measures like trim mean CPI and super core PCE are stuck at levels 100-150 basis points above the Fed's 2% target.
Japan is the only major economy in the world with above-trend GDP growth, a composite PMI above 50, and both headline and core inflation above trend.
If the Bank of Japan tightens monetary policy further, the 10-year U.S. Treasury yield could rise to a range of 5.00% to 5.25%.
42 Macro's models suggest that the long-term U.S. 10-year Treasury yield should be between 6% and 7% due to low term premia and fiscal policy dynamics.