Recently, the U.S. dollar index fell rapidly. It fell continuously last Thursday and Friday, and fell below the recent continuous consolidation platform. It fell below the 105 mark at the lowest level and hit a new low since late September. U.S. bond yields have also fallen in the short and medium term. What impact will it have on the market?
//The U.S. dollar index adjusts again//
Looking at the general direction of this year, the U.S. dollar index continues to rise, once climbing to a high of 107.35 in early October, and then began to consolidate. However, last Thursday and Friday, driven by two big negative lines, it fell below the sideways fluctuation platform that lasted for more than a month, hitting a new low since September 21. It continued to fall back on Monday, and this round of downward adjustment trend has basically formed.
However, Wind market data shows that the U.S. dollar index has only fallen by about 1.1% since its highest point in this round, which is significantly lower than the previous three adjustments this year. Among them, the first wave of slight decline in the U.S. dollar index started in January and bottomed out in early February, with a decline of more than 1.6%; the second wave was a decline of more than 3.5% from early March to mid-April; and the third wave was from June to July. An adjustment of more than 4% in the middle period. Comparatively, it can be seen that this round of adjustment of the US dollar index may not be enough. With the Federal Reserve suspending interest rate hikes continuously, the US dollar index is likely to continue to decline in the future.
// Short- and medium-term U.S. bond yields have fallen //
As the Federal Reserve continues to suspend interest rate hikes, short- and medium-term U.S. bond yields have fallen. Wind data shows that judging from the short-term 2-month U.S. Treasury yield trend, the overall upward trend this year is obvious. It gradually rose from 4.42% at the beginning of the year to a high of 5.61% at the end of September, and then fell slightly to the latest 5.56%, with a smaller decline. The mid-term 10-year U.S. Treasury yield has made a sharp correction recently, falling from a high of 4.98% in late October to the current 4.57%. The decline is rapid and is significantly different from the short-term yield. It can be seen that once the Fed stops raising interest rates or expectations ease, U.S. bond yields are also expected to fall steadily. The U.S. dollar index may gradually weaken.
//What is the impact on the market? //
The U.S. dollar index fell sharply, coupled with the Federal Reserve continuing to suspend interest rate hikes, and expectations of interest rate cuts in the future increasing, which has a positive effect on precious metals, and there are opportunities for gains.
Industrial Securities’ Lai Fuyang analyzed that the Fed’s decision not to raise interest rates in November and the overall weakening of employment, non-agricultural and other data on Friday caused the US dollar to plummet and US dollar commodities to be overall stronger. Fundamentally, the current contradiction between supply and demand is relatively weak, and the output of electrolytic copper has increased slightly. Although the willingness to receive goods from downstream has declined slightly due to the rebound in copper prices in the near future, the demand-side resilience is still strong. Looking forward to the market outlook, the early period of the strongest US dollar may have come to an end. Global risk asset preferences have increased, coupled with rising expectations for positive domestic economic policies, the sector has actively allocated on dips and is bullish on US dollar commodities dominated by domestic demand.
Jin Qianjing and Wang Sheng of Shenwan Hongyuan believe that the Federal Reserve’s tightening expectations have slowed significantly, U.S. bond yields have fallen sharply + the U.S. dollar index has weakened marginally, and the main impacts on the domestic bond market are:
1. Negative: The Fed’s tightening of monetary policy is expected to ease, which is expected to significantly boost global risk appetite. The restoration of domestic risk appetite may bring some suppression to the bond market.
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2. Bullish: The Federal Reserve’s tightening expectations are slowing down, the US dollar is weakening, and the pressure on the depreciation of the RMB has been eased. The pressure on the central bank to stabilize the exchange rate will be eased, and the exchange rate constraints faced by domestic monetary policy and funding interest rates will become smaller. Therefore, after the pressure on the RMB exchange rate depreciation has eased, under the current background of weak domestic fundamentals and weak regulatory incentives for financial deleveraging, it is expected that the central bank will still need to maintain reasonably sufficient liquidity, while funds will return to a loose and bullish bond market.
Looking back, from 2018 to 2023.10, the correlation coefficient between the 10Y China Bond yield, the 10Y U.S. bond yield and the U.S. dollar index was the highest. The correlation coefficient between 10Y China Bond and the U.S. dollar index was -0.66, and 10Y The correlation coefficient between ChinaBond and 10Y U.S. Treasury yields is low. However, the weakening of the US dollar index has led to a substantial adjustment in the domestic bond market, which generally requires a shift in domestic funding rates from loose to tight. Currently, domestic funding rates are significantly higher than the policy interest rate, so the probability of this happening is low. We are more inclined to believe that the marginal slowdown in the Federal Reserve’s tightening expectations will lead to the easing of the depreciation pressure on the RMB. Monetary policy and funding rates may be more focused on domestic fundamentals, which may be mainly positive for the domestic bond market. We continue to pay attention to the “bull steep” view.