China Business Network Client, August 6th Title: "Zhang Ming: The US dollar index has a high probability of entering a bear market"
Author Zhang Ming (Chief Economist of Ping An Securities, Director of the International Investment Research Office of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences)
The US dollar index has a high probability of entering a bear market and is likely to decline further in the future; but given the current high uncertainty around the world, weak global economic growth, and the economic recovery of other developed economies may also face twists and turns, the rapid decline of the US dollar index is a small probability event, and it is more likely to be gradually declining in fluctuations. It is expected that in the second half of 2020, the US dollar index may fall below 90, but it is unlikely that it will fall further to 85. Overall, the current gold bull market seems to have reached the mid-to-late stage, and volatility will significantly intensify in the future.
From the beginning of 2020, the most popular variety among major assets in the world is gold. The spot price of gold in London continued to rise from the end of 2019, and so far the price has exceeded the highs per ounce on September 5 and 6, 2011, setting a record high. This round of gold prices rose, and the downward trend of the US dollar index was one of the important driving forces. For example, from March 19 to July 29, 2020, the US dollar index fell from the year-on-year high of 102.69 to 93.28, a drop of 9.2%; during the same period, gold prices rose by 32.3%. In other words, where the gold price will go in the future depends largely on the trend of the US dollar index.
Observing the trend of the US dollar index for a long period of time, it is not difficult to find that since the US dollar decoupled from gold in the early 1970s, the US dollar index has experienced "three falls and three rises". The first bull market rose from 84.37 at the end of October 1978 to 164.72 in late February 1985, with a duration of nearly 6 and a half years, with an increase of about 95.2%. The second bull market rose from 78.94 in late August 1992 to 120.90 in early July 2001, with a duration of roughly 9 years, with an increase of about 53.2%. The third bull market rose from 71.31 in late April 2008 to 103.30 in late December 2016, with an increase of about 8 and a half years, with an increase of about 44.9%. It is worth noting that the third bull market of the US dollar index has shown a "double-headed" feature so far, with the high in March 2020 (102.69) very close to the high in December 2016 (103.30). If March 2020 is regarded as the high point of this bull market, then the third bull market of the US dollar index lasted for 12 years. In comparison, the three bull markets of the US dollar index show the characteristics of gradually extending the duration and gradually decreasing the increase.
From the current and future market situation, the author believes that the third bull market of the US dollar index has ended and may further decline in the future. In the next period of time, there are three main factors that further lower the US dollar index: First, due to the greater downward pressure on the economy and the rising scale of US federal government debt, the Federal Reserve will continue to implement a zero-interest rate plus quantitative easing policy, and the US dollar's short-term and long-term real interest rates will continue to remain low. Second, due to the differences in the epidemic situation, the economic growth prospects of the eurozone, the UK and Japan may rebound faster marginally than the United States, which will lead to the depreciation of the US dollar against the currencies of other developed countries; Third, Sino-US frictions may intensify in all aspects in the future, which will cause damage to the global economy, and the damage to China and the United States will be relatively greater, which may lead to the depreciation of the US dollar and the RMB against the currencies of other developed countries at the same time.
At the same time, it should also be noted that the US dollar index may not be very fast. Recently, American economist Stephen Roach said that the US dollar index may fall 35% in the next two to three years. This estimate may be too high, mainly because some factors may still drive the US dollar index to rise in the future: First, the intensification of global economic and political conflicts is a high probability event, which will enhance investors' risk aversion sentiment. The safe-haven funds that gold, yen and Swiss franc can accommodate are limited, and only the US Treasury bonds and the US dollar themselves can provide sufficient "ammunition" for safe-havens. Second, from historical experience, if the global economic growth rate cannot rebound significantly, the weakening of the US dollar index will be relatively limited. As a typical counter-cyclical asset, the time when the US dollar index fell sharply in history was usually the day when global economic growth "raises" .But from the current perspective, it is difficult for the global economy to get rid of the "long-term stagnation" trend in the short term. Third, due to the role of large-scale countercyclical macroeconomic policies and the strong competitiveness of the US financial market, it is not ruled out that the US economy will rebound faster than other major developed countries in the future.
To sum up, the author believes that the US dollar index has most likely entered a bear market and is likely to decline further in the future; but given the current high uncertainty around the world, weak global economic growth, and the economic recovery of other developed economies may also face twists and turns, the rapid decline of the US dollar index is a small probability event, and it is more likely to be gradually declining in fluctuations. It is expected that in the second half of 2020, the US dollar index may fall below 90, but it is unlikely that it will fall further to 85.
If the US dollar index fluctuates and falls in the future, when other conditions remain unchanged, the gold price will still have a certain amount of room for growth, and the fluctuations of the US dollar index will also determine the fluctuations of the gold price. In addition, global uncertainty, economic growth situation, marginal changes in the central bank's monetary policy, and other factors will also affect gold prices. Overall, the current gold bull market seems to have reached the mid-to-late stage, and volatility will significantly intensify in the future. (This article was first published in " China Foreign Exchange ") (China News Service APP)
Zhang Ming
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