Core Views
We proposed in the second half of the year's macro report released in July last year that the US dollar entered an appreciation trend. Since then, many important reports and the "Major Asset Allocation Report" have believed that the US dollar is in an appreciation trend, especially in the context of increasing market differences in September, we still believe that the US dollar will break through the 110 mark. This is highly consistent with our judgment on the aggressive path of the Federal Reserve's interest rate hike and the increase in US interest rates beyond expectations. We believe that this round of US dollar appreciation is roughly divided into three stages: global liquidity contraction (2021.06-2021.09), energy crisis shock (2021.09-2022.12), and economic crisis shock (2023.01-2023.06). In the three stages of
, the US dollar is related to the growth rate of total assets of the central banks of the four countries, the divergence of energy price trends, and the decline of US stocks. As the economy falls into a sluggish next year and inflation falls back, monetary policy may turn to easing again, and the US dollar appreciation cycle will basically peak at that time. We believe that this time is difficult to predict clearly, and the time when the dollar appreciation lasts in the final stage is more important than space. Under the continuous geopolitical conflicts such as the unknown direction of the Russian-Ukrainian conflict and the emergence of the shadow of the nuclear war, the uncertainty of the US dollar's trend is higher. Then we will analyze and judge by observing the gold trend.
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. What is the reason for the continued appreciation of USD? Especially when the US dollar broke through 100, the market was divided. Many analysts believe that the US dollar cannot break through 100, and some believe that it has reached its peak at that time. As a macro researcher, especially in business research, we pay more attention to the changes in the entire process of the formation, development and end of trends. We believe that from mid-last year to mid-next year, the appreciation of the US dollar is divided into three stages.
#01
Phase 1: Global liquidity contraction (2021.06-2021.09)
In 2021, the world is still shrouded by the new coronavirus pandemic, governments are still rescuing the market, and the balance sheet of the major economies is still expanding, but the growth rate has slowed down. For example, in February 2021, the year-on-year growth rate of the total assets of the central banks of the four countries (US, Europe, China, and Japan) peaked and fell. Under this background, the US dollar bottomed out in mid-2021, changing from a depreciation trend to an appreciation trend.
Feder did not raise interest rates in 2021 in 2021. Although Chairman Powell said in March that he began to consider "reducing the amount of U.S. Treasury bonds and mortgage-backed securities purchased", he said after the interest rate meeting in April that he said, "Isn't it now starting to talk about reducing the scale of bond purchases." At the time, in June, the "excess reserve rate (IOER) was adjusted from 0.1% to 0.15%", and at this time monetary policy turned and the US dollar bottomed out; in July, Powell said, "If inflation rises too much, the Federal Reserve is ready to adjust its policies, but there is still a long way to go before starting to gradually reduce the threshold for asset purchases." In August, Powell finally put forward a hawkish view: the Federal Reserve may start to reduce bond purchases this year, but will not rush to raise interest rates. In September, the price hike may be a little earlier than expected. In November, the price of balance sheet reduction will be reduced by $15 billion in asset purchases, and in the end, the balance sheet reduction will be increased in December, "double the speed of reducing the code to $30 billion per month."
The change in the Federal Reserve's monetary policy orientation has led to a shift in global liquidity from loose to tightening. In June 2021, the interest rate of the two-year U.S. Treasury bonds began to rebound, from 0.2% to 0.7% at the end of the year, and then to 3% in the middle of this year, with a speed that continued to accelerate; at the same time, the first rebound of US interest rates has caused the world's US dollar liquidity to tighten, the spread of interest rates in the European and American to expand, and the euro depreciates and the dollar appreciates.
However, because the Fed missed the opportunity to raise interest rates, the United States entered a spiral growth stage of wage-inflation, and inflation entered a state of out-of-control. In April 2021, the US inflation expectations began to rise. At this time, CPI broke through the highest point of the past decade and was rising rapidly; the core CPI broke through the high point of the past fifteen years and was rising rapidly. By September, when the Fed chairman abandoned the argument that "inflation is temporary" and was preparing to tighten monetary policy, the US dollar entered the second stage of appreciation due to the rise in energy prices.
#02
Phase 2: Energy crisis shock (2021.09-2022.12)
In September last year, the euro against the US dollar was still around 1.16, and now it is around 0.97. When the epidemic broke out in 2020, the lowest exchange rate of euro was only around 1.06; similarly, the US dollar against the Japanese yen was still 111, and now it is 145, and the depreciation trend of the Japanese yen also began at that time. , both countries are developed countries and account for a large weight of in the index. Their concentrated depreciation reflects the strong trend of the appreciation of the US dollar.
In addition to developed countries, emerging market countries also encounter strong depreciation pressure. The most representative of is Turkey and Argentina . In September 2021, the US dollar was almost 9 against Turkish lira . However, at that time, the Turkish central bank not only did not raise interest rates, but instead cut interest rates. The Turkish currency entered a rapid depreciation channel. By September this year, it had depreciated to 18, depreciated by half in a year. The depreciation of the US dollar against the RMB was in April this year. The exchange rate was around 6.35 before April, and now it has reached around 7.1. The depreciation rate is relatively limited compared with other emerging market countries, but it is also under great pressure.
The energy crisis is a common reason for the depreciation of currencies in these countries. Europe and Japan are both energy-dependent countries, especially the dependence of EU on Russia's natural gas has reached 48.4%. According to the report of China Energy News , due to the abnormal climate last year, the overall wind power in the North Sea in Europe was insufficient in summer and autumn, and wind power output decreased significantly. The EU's wind power generation from January to September fell by 17% year-on-year. Since the EU's power generation mainly relies on natural gas, the decline in wind power has increased the demand for natural gas in the EU. Since September last year, natural gas prices have soared and have left crude oil behind. Almost at the same time, the EU's trade surplus began to decline rapidly and soon became an increase in deficit. This year, due to the Russian-Ukrainian conflict and Russia's cessation of gas on the EU, the energy crisis has continued to deepen, natural gas prices have continued to soar, and the euro has continued to depreciate significantly.
also started in September last year. The US dollar diverged from the year-on-year and crude oil prices, and the US dollar appreciated significantly. From a historical perspective, the appreciation of the US dollar is often accompanied by the decline in the price of commodity , but this time the crude oil price did not fall, but the price became higher and higher. This shows that the energy crisis is an independent variable that is separated from the global economic cycle, which leads to divergence from the US dollar and requires the US dollar to achieve a greater appreciation to suppress energy prices.
We believe this winter will be the climax of this energy crisis. According to "How much impact will Russia's cessation have on the EU?" 》The report estimates that EU natural gas inventory will drop to its historical lowest point in March next year, and it will pass through this winter thrillingly, but natural gas prices may continue to hit record highs. While the energy crisis is breaking out, another crisis is also incubating, which may become an important reason for the appreciation of the US dollar to enter the third stage.
#03
Phase III: Economic Crisis Impact (2023.01-2023.06)
After the conflict between Russia and Ukraine, the energy crisis has transformed from a simple economic phenomenon to a geopolitical issue. The surge in energy prices may only affect production and income, geopolitical conflicts may cause the collapse of the world trade system, and the cost of distrust, transportation costs, safety premiums, etc., will cause increased demand and uncertainty.
Our analysis starts with the relationship between the U.S. import price index and crude oil price year-on-year, and the two have shown a significant divergence this year. When crude oil prices are falling rapidly year-on-year, the import price index fell late and slower year-on-year. shows that the US demand is more resilient.
This is not only reflected in price, but also in terms of quantity, the growth rate of demand in the United States is also very strong. Since last year, the year-on-year growth rate of import amount has been significantly higher than the price growth rate, and the growth rate of import quantity has also remained above the high point of the past decade, which is consistent with the growth rate of new orders in the manufacturing industry, indicating that this is real import demand.
As the currency tightening effect appears, the labor market is cooling down and will decline in the fourth quarter. The pressure of high inventory will be released soon, import demand will also fall rapidly, and the growth rate of import prices will also return quickly with energy prices. After that, U.S. inflation will naturally fall, corporate profits will also shrink significantly, and credit spreads will rise again. We have predicted that the European and American economies may enter a crisis next year in "The Bear Market in Developed Markets".
According to historical laws, the year-on-year growth rate of the US dollar is in a positive relationship with the US credit spread and a negative relationship with the growth rate of the US stock index. In a crisis state, the US dollar is more susceptible to international investors as a safe-haven asset. The credit spread of the United States has rebounded since the beginning of this year, and the U.S. stock market has also retreated sharply, but this is just the beginning. If US stocks continue to fall sharply next year, the corresponding US dollar may continue to appreciate.
In addition to a significant reduction in demand, geopolitical conflicts may also trigger crises. On September 22, former Russian President and current Vice Chairman of the Federal Security Conference Medvedev stated that for the latest territory to join Russia, Russia can use nuclear weapon for defense operations. This may change the future world trend. Since Russia implemented the "Special Military Operation" on February 24 this year to the "Second General Mobilization" on September 21, the Russian-Ukrainian conflict has always remained within the scope of local wars. But the turning point is currently on. Is the war coming to an end or expanding? The escalation of the situation may cause market panic again.
We believe that the US dollar will enter the third stage and will also be the last stage. As European and American countries fall into deep downturns in their economy and turn monetary policies again, the US dollar will basically peak. The economic crisis is short and the space is large. At that time, the policy may turn quickly. The specific time cannot be predicted in advance. We roughly estimate that the time will be before June next year. It is difficult to accurately estimate which position the US dollar index finally rose to. The duration of the US dollar appreciation may be more meaningful than space.
The economic crisis and the shadow of nuclear war prompted the US dollar to hit a new high. In this process, the US dollar's competitor is gold. Although gold prices fall with the appreciation of the US dollar in the short term, economies or organizations separated from the US dollar system may be converting the US dollar into gold, and at that time, the price of the US dollar and gold may rise at the same time.
Risk warning : The macroeconomic environment is lower than expected; international commodity prices fluctuate; the Federal Reserve's interest rate hike is lower than expected; credit events break out in a concentrated manner.
(Author Jiang Fei is the chief macro analyst of Great Wall Securities)
