Recently, the US dollar index has risen again and has attracted market attention. After major economies around the world have gradually promoted economic restart, the US dollar index has shown a rapid downward trend starting at the end of May. However, since early August, the decline of the US dollar index has not continued, and the US dollar index showed signs of rebound in the second half of September. Since the epidemic this year, the market has formed strong consensus expectations for a weak US dollar. So how do you view the current performance of the US dollar trend beyond expectations? CITIC Securities Mingming Bond Research Team will give views and opinions from the two perspectives of election disturbances and the Federal Reserve's balance sheet expansion speed.
CITIC Securities Mingming Bond Team said that since the epidemic this year, the market has formed relatively strong consensus expectations for a weak US dollar trend, but judging from the recent performance of the US dollar, the US dollar index has stopped falling and rebounded to a certain extent beyond the previous market expectations. Although in the long run, there are two factors that cannot be ignored in the short run. One is the disturbance brought by the US election to the US dollar, and the other is the speed of the expansion of the Federal Reserve's balance sheet .
Core Views
Recently, the US dollar trend has stabilized and rebounded: the US dollar index has changed from a strong momentum at the end of May, but it has stabilized since early August and showed signs of rebound in the second half of September. In fact, since the outbreak of the epidemic this year, the market has formed relatively strong consensus expectations for a weak US dollar trend, but judging from the recent performance of the US dollar, the US dollar index has stopped falling and rebounded to a certain extent beyond the previous market expectations. Although in the long run, the US dollar has a strong weakening reason, in the short run, we believe that there are two factors that cannot be ignored. One is the disturbance brought by the US election to the US dollar, and the other is the speed of the Fed's balance sheet expansion.
From a historical perspective, the impact of the election on the US dollar trend: From a historical perspective, we reviewed the US dollar index trend in the month before the election since 2000, and found that as the election approaches, the US dollar index tends to rise in October except in 2004. The uncertainty brought about by the approaching election may deepen the market for safe-haven by the US dollar. October is about to enter, with only about one month left before the 2020 US presidential election, and the competition between the two parties in the United States has also entered a white-hot stage. In September this year, the sudden death of Justice Ginsberg of the US Supreme Court has further aggravated the gunpowder smell of competition between the two parties. The competition for candidates for justices may also increase the game between the two parties in the new round of stimulus bills to a certain extent. If the confrontation between the two parties deepens, the market may lower the expectations for the stimulus bills, and risk aversion may further aggravate.
Feder balance sheet expansion speed: Another factor affecting the US dollar index in the short term is the rate of expansion of the Fed's balance sheet. Although the Federal Reserve is still in the process of continuing to purchase bonds, the central bank's liquidity swap tools launched in the early stage to deal with the tension in the US dollar have matured one after another and have not chosen to sequel. At present, the pace of the expansion of the Federal Reserve's balance sheet has slowed down. Looking back at the three rounds of quantitative easing policies adopted by the Federal Reserve during the financial crisis in 2008, we can find that when the Federal Reserve's balance sheet expansion slowed down, the US dollar index showed certain signs of rebound. It is also worth noting that during the epidemic, the ECB also launched a huge asset purchase plan, which may also affect the US dollar after the Federal Reserve's balance sheet expansion slowed down and rebounded beyond expectations.
Bond Market Strategy: Since the outbreak of the epidemic this year, the market has formed strong consensus expectations for the performance of weak US dollars. Overall, we believe that although there are strong reasons for the US dollar from a long-term perspective, in the short term, the disturbances brought by the US presidential election to the US dollar and the speed of the Fed's balance sheet expansion cannot be ignored.For RMB exchange rate , we have repeatedly reiterated the view that the RMB exchange rate is cautious and bullish, and proposed that although the RMB exchange rate has support in the direction of appreciation, its process may not be achieved overnight. In the short term, we believe that the current US dollar reflects signs of an oversold rebound that may bring to the RMB exchange rate is still worth paying close attention.
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Recent US dollar trend has stabilized and rebounded
US dollar index has changed its strength since the end of May, and it has begun to decline rapidly, but it has stabilized since early August and showed signs of rebound in the second half of September. Judging from the trend of the US dollar in the second half of this year, as major economies around the world gradually promoted economic restart activities at the end of May, market optimistic expectations have increased. The US dollar index has changed its strong momentum since the end of May. As of the end of July, the US dollar index fell to 93.4841, down about 4.9% from the end of May. As time entered August, the decline of the US dollar index stabilized and entered a volatile adjustment stage, which was generally between 92 and 93. Judging from the recent trend of the US dollar index, the US dollar index showed a relatively obvious sign of rebound in the second half of September. On September 25, the US dollar index closed at 94.5871, up 1.8% from September 17, and has risen 2.6% so far in September.
In fact, since the epidemic this year, the market has formed relatively strong consensus expectations for a weak US dollar trend, but judging from the recent performance of the US dollar, the US dollar index has stopped falling and rebounded to a certain extent beyond the previous market expectations. Although in the long run, the US dollar has a strong weakening reason, in the short run, we believe that there are two factors that cannot be ignored. One is the disturbance brought by the US election to the US dollar, and the other is the speed of the Fed's balance sheet expansion. Looking back at the market's views on the trend of the US dollar since the outbreak of the epidemic this year, in fact, after the outbreak of the epidemic, combined with the Federal Reserve's large-scale monetary easing policy, the market has formed relatively strong consensus expectations for the performance of a weak US dollar. However, judging from the performance of the US dollar index in the past two months, the US dollar index has stabilized since August and showed certain signs of stopping and rebounding in the second half of September. The current US dollar index trend has exceeded the previous market expectations to a certain extent. Although from a long-term perspective, the US dollar has a strong weakening reason, based on the current US dollar trend and influencing factors, we believe that in the short term, there are two factors that cannot be ignored. One is the disturbance caused by the US presidential election as time approaches the US presidential election, and the other is the speed of the expansion of the Federal Reserve's balance sheet.
From a historical perspective, the impact of the election on the US dollar trend
From a historical perspective, we look at the US dollar index trend during the election. We reviewed the US dollar index trend in the month before the election since 2000, and found that as the election approaches, except in 2004, the US dollar index tends to rise in October. The uncertainty brought about by the approaching election may cause the market to demand for US dollar safe-haven. Regarding the disturbances of the US election to the US dollar index, we review the performance of the US dollar index in the first month of the previous election year since 2000 from a historical perspective. Judging from the situation in previous election years, except in 2004, as the US presidential election approaches, the US dollar index tends to rise in October. From the reason, we believe that the market focus before the election was relatively concentrated, and the uncertainty brought about by the approaching election gradually deepened. The market may tend to increase the demand for US dollar safe-haven, which will drive the US dollar index upward. This can also be seen from the performance of the VIX index that in the month before the election, the US VIX index also showed a significant upward trend, reflecting the increased risks brought to the market by the election.
As time is about to enter October, with only about one month left before the voting for the 2020 US presidential election, the competition between the two parties in the United States has also entered a white-hot stage. The sudden death of Justice Ginsberg of the Supreme Court in September this year has further aggravated the gunpowder smell of competition between the two parties.The presidential voting day for the 2020 US election is November 3. As time goes by October, there is only about one month left before the voting day, and the competition between the two parties in the United States is about to enter a white-hot stage. What’s more special is that the sudden death of US Supreme Court Justice Ginsberg in September this year further aggravated the gunpowder smell of competition between the two parties. Judging from the current situation, US President Trump officially nominated conservative candidate Amy Coney Barrett on the 27th of this month to replace Ginsburg as Justice of the U.S. Supreme Court. Trump obviously hopes to finalize the candidate for the Justice before the election begins. Among the 9 seats of the Supreme Court justices, conservatives currently occupy as many as 5 seats. If Barrett can be successfully elected, the number of conservative justices will reach 6 among the nine seats, which also means that if the election ultimately needs to be arbitrated by the Supreme Court, Trump will have a clear advantage in the Supreme Court. And for the Democrats, it is obviously unfavorable to have Trump confirm the candidate for the Supreme Court before the election. From the perspective of separation of powers, Trump currently holds the president's executive decision-making power. For Congress, which has legislative power, although the current Congress is not fully controlled by the Republican Party, from the perspective of the Senate and the House of Representatives, the Republican Party currently holds the relatively more important Senate. Therefore, if Barrett is successfully selected this time, it is expected that the Supreme Court's judicial power will also be tilted to the Republican side, and the Democratic Party's disadvantage will be significantly expanded.
The competition for candidates for justices may also increase the game between the two parties in the new round of stimulus bills to a certain extent. If the confrontation between the two parties deepens, the market may lower the expectations for the stimulus bills, and risk aversion may further aggravate. While the two parties in the United States are competing against the candidates for the Supreme Court, the two parties are still unable to reach an agreement on the new round of stimulus bills, and the negotiations are still in a deadlock. If the Republican forcibly recommends the candidate for the Supreme Court, this will inevitably intensify the degree of game between the two parties, and the market's expectations for the stimulus bill may be lowered as a result. Last week, Federal Reserve Chairman Powell said in a public speech that the Fed has done everything he can think of and reiterated that "there is likely to be needed for additional fiscal support measures", so the lowered expectations of the stimulus bill may further aggravate the market's risk aversion sentiment.
Feder balance sheet expansion speed
In the short term, another factor affecting the US dollar index is the expansion speed of the Fed's balance sheet. Although the Federal Reserve is still in the process of continuing to purchase bonds, the central bank's liquidity swap tools launched in the early stage to deal with the tension in the US dollar have matured one after another and have not chosen to sequel. At present, the pace of the expansion of the Federal Reserve's balance sheet has slowed down. In the short term, we believe another factor that affects the U.S. dollar index is the rate of expansion of the Federal Reserve's balance sheet. When the US dollar liquidity tension formed a "dollar shortage" market in March, the Federal Reserve opened a liquidity swap tool with other central banks around the world very early to stabilize the US dollar liquidity problem. At the same time, as the Federal Reserve launched "unlimited QE", the size of the Federal Reserve's balance sheet began to rise rapidly. However, as the US dollar liquidity crisis gradually resolves, the central bank's liquidity swap tools have also matured one after another. After maturity, these tools have not chosen to sequel. Therefore, although the Federal Reserve is still in the process of continuing to purchase bonds, the pace of expansion of the Federal Reserve's balance sheet has slowed down. Compared with the high level of the Federal Reserve's balance sheet size on June 10, we can see that as of September 23, the scale of all Federal Reserve banks holding Treasury bonds + MBS increased by about US$470.387 billion, while the scale of central bank liquidity swap decreased by about US$412.57 billion. The current balance sheet size of the Federal Reserve fell by about US$75.775 billion compared with June 10.
Review of the three rounds of quantitative easing policies adopted by the Federal Reserve during the financial crisis in 2008, we can find that when the Federal Reserve's balance sheet expansion slowed down, the US dollar index showed certain signs of rebound. It is also worth noting that during the epidemic, the ECB also launched a huge asset purchase plan, which may also affect the US dollar after the Federal Reserve's balance sheet expansion slowed down and rebounded beyond expectations. Looking back at the three rounds of quantitative easing policies adopted by the Federal Reserve during the financial crisis in 2008. The three rounds of quantitative easing periods were located in November 2008 to April 2010, November 2010 to June 2011, and August 2012 to October 2014. From the relationship between the Fed's balance sheet size and the US dollar index, during the three rounds of QE, we can find that when the Fed's balance sheet expansion slowed down, the US dollar index showed certain signs of rebound. At the same time, during this epidemic, it is also worth noting that the ECB has also launched a huge asset purchase plan to cope with the impact of the epidemic on the economy. The scale of the ECB's balance sheet has risen sharply by about 1.8 trillion euros compared with mid-March, which has also affected the US dollar after the Fed's balance sheet slowed down and rebounded beyond expectations.
Overall, we believe that although there are strong reasons for the US dollar to weaken from a long-term perspective, there are two factors that cannot be ignored in the short term. One is the disturbance brought by the US election to the US dollar, and the other is the speed of the expansion of the Federal Reserve's balance sheet. Regarding the RMB exchange rate, we have also been on the "Bond Market Qiming Series 20200902" many times before - has the RMB exchange rate appreciated in the long term? 》, "Bond Market Qiming Series 20200824—Preventing the Risk of the US dollar's rebound" and "Bond Market Qiming Series 20200714—Can RMB appreciation continue? The three major factors are the key" and other reports point out that we are cautiously bullish about the RMB exchange rate, and put forward that although the RMB exchange rate has support in the direction of appreciation, its process may not be achieved overnight. In the short term, we believe that the current US dollar reflects signs of an oversold rebound that may bring to the RMB exchange rate is still worth paying close attention.
Risk factors
Market liquidity fluctuates significantly, the growth rate of the macro economy is not as expected, the risk-free interest rate fluctuates significantly, and the stock price of the underlying stock fluctuates beyond expectations.
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