Liquidity index raises doubt on US economy

The Global Liquidity Index has shed light on the extent to which the rise in the value of the US dollar is being driven by monetary policy made in Frankfurt and Beijing, rather than Americas economic strength.

Liquidity index raises doubt on US economy


According to the data compiled by CrossBorder Capital the monetary stance in China has been getting continuously looser for six months in a row and its liquidity rating now stands at 65.8.

A figure above 50 indicates expansionary monetary policy while under 50 means overall policy is contractionary.

CrossBorder Capital also noted liquidity in the euro area is significantly up already, even though the European Central Bank’s quantitative easing programme has just begun. The liquidity rating for the single currency bloc was as 65.9 in February compared with just 28.3 six months earlier.

“The People’s Bank of China is definitely easing, the data show looser conditions which are likely to be confirmed when the RMB begins to slide,” said CrossBorder Capital’s MD Michael Howell. “China is addressing its problems and it is leading the way among other emerging markets, where the Bretton Woods II system of dollar pegs is quietly being abandoned.”

“The biggest increase in liquidity is taking place in the eurozone even before the ECB had got going,” added Howell. “A lot of that liquidity has come from the private sector.”

“Still, the amount of money available for investment globally has fallen by just over $6 trillion over the last six months, amid a sharp deterioration in the US corporate cash flows that have been underpinning Wall Street’s bull run,” Howell said. “Current levels of liquidity do not yet signal recession, but point instead to economic slowdown in the US over coming months, greater market volatility and will prompt the Fed to keep rates steady.”

“The collapse of the euro is probably more a case of eurozone weakness rather than US strength,” said David Absolon, investment director at Heartwood Investment Management. “US growth is moderate relative to previous recovery cycles, it is certainly not going gangbusters but is exceeding the eurozone, which is expected to grow 1 .7% this year.”

“Furthermore, the US twin deficit issue has not gone away, Absolon added. “The US current account deficit was 2.3% of GDP in 2014 and is expected to remain around that level this year and next. In contrast, and suggesting that all is not lost for the euro, the eurozone had a current account surplus of 2.4% in 2014 and is forecast to rise to 3.2% this year.”

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