How The Whales Could Dump More US Dollars

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Hear, hear: the US Dollar is going down. Investors love to attach an ex-post narrative to any price action, and this time the blame was on Trump’s erratic policies, the reduced attractiveness of US assets, and ‘’China dumping’’. Two of these actually make sense (you can easily guess which ones).But there is a much bigger catalyst for the USD to sell-off more: FX hedging flows from proper ‘’whales’’. These whales control $30 trillion (!) in USD-denominated assets, of which 13 trillion in equities and the remaining portion in fixed income instruments. You may know these whales by their common names: GPIF, Norges Fund, CPPIB, APG, SuperAnnuation… Foreign pension funds, insurance companies and asset managers are the true whales that could dump more US Dollars in an attempt to correct their sizeable and secular ‘’under-hedging’’ of USD risk:In this article I will try to explain why these FX hedging flows (sell USD) could be triggered, quantify how big these flows could be, and assess which countries and currencies could represent the bulk of it. The analytical process requires us to identify how big their USD asset pool is (in % of their domestic economy) and how much under-hedged they are. But first – why do foreign whales actually ‘’under-hedge’’ their USD risk exposure?Imagine you are the CPPIB – Canada’s biggest pension fund with $500bn+ in AuM.You have to generate a consistent return of ~6-7% to be able to service your liabilities (future pensions), which means you’ll invest in a portfolio of stocks, bonds, real estate and alternatives. Your liabilities are in CAD (as you’l…