‘Quantitative Squeezing’: Prospects for Global Liquidity in 2018

Nervy investors are looking in the wrong place. It is reversing cross-border flows and not reversing Central Bank QE that poses the major risk for 2018. Overall, this year will see positive gains in both Global Liquidity and Central Bank money, but at much reduced rates when compared to 2017. China, which is entering the New Year with faster liquidity growth and more policy impetus that many recognise, is critical to prospects. On paper, we expect less US dollar weakness this year than last, but the dollar could be the key test for investors. A more rapid exit of US$3 trillion of foreign flows from the US, is easily a bigger threat that the slated more gradual withdrawal of US$1-2 trillion of QE, and paralleling events in 1987, it could trigger a second-half sell-off. Whatever, the alternative currency to watch is the Chinese Yuan, which has the potential to grab a large share of the US dollar reserve currency market. In this light, gold may also be a winner, despite reverse QE policies.