From 103.9 in March to 100 in May, and then to 97 in June, the US dollar index has now fallen again, falling below 93.5, and hit 93.45 on July 29, refreshing its lowest level since June 2018.
China Business News reported earlier that since the second quarter, the major Wall Street banks have been collectively bearish on the US dollar, but the bearishness still remains on the point of view, and has not yet been substantially put into practice, because the institutions worry about trade frictions and other uncertain factors leading to the US dollar in March. "Desolation" is making a comeback. But at present, the "weak dollar" market has officially started. Although there may be twists and turns in the middle, the medium and long-term trend has been roughly established, which will have a profound impact on global asset allocation and the Chinese market.
The "weak dollar" market kicked off
The normalization of the anti-epidemic, the gradual restart of global economic activities, and the increased certainty of the advent of vaccines have alleviated the tensions in the global market, and the disappearance of the advantage of the dollar's interest rate has pushed the dollar down.
In fact, the current downward trend of the US dollar is exactly the same as the scenario when the liquidity crisis eased after the 2008 financial crisis. The current U.S. dollar has depreciated by nearly 10% from its high of nearly 104 in March, but this has not ended. Standard Chartered Global Research Director Eric Robertsen told reporters that with the gradual recovery of the global economy, if investors begin to allocate funds to commodities and emerging markets again, they will reduce their allocation of US dollar assets, which will be US dollars. The accelerator of the real devaluation trend. How far can the devaluation of the dollar go? The low of the US dollar at the beginning of 2018 seems to be a reasonable initial target-there is still 7% downside compared to the current one.
The agency predicts that after falling below 93.5, the US dollar index may test the staged low of 87.
At present, the real yield of U.S. Treasuries (excluding inflation) and the Fed's monetary policy are crucial. In terms of the actual yield of the 10-year U.S. Treasury bond, it was about 1.07% in November 2018. So far, the yield has dropped by 200 basis points (BP), and is currently only about -0.9%. The Fed recently stated that it will extend the emergency loan program until December 31. Since March, the Fed has expanded its balance sheet by nearly US$4 trillion. Institutions predict that it will be difficult for the Fed to substantially reduce its balance sheet or raise interest rates in the medium term.
Prior to this, the market was panicked about the Fed’s apparent “shrinking of the balance sheet”. For example, in the week ending June 17, the Fed’s balance sheet contracted by $74 billion, which even led to a slight strengthening of the U.S. dollar at that time. Steve Englander, head of foreign exchange research at Standard Chartered G10, told reporters that due to the "dollar shortage" in the market earlier, the Fed also began to swap dollars with major central banks to ease the shortage of dollars. However, with the easing of risk sentiment and the expiration of the swap agreement recently, the counterparty no longer urgently needs US dollar liquidity. Therefore, there is no need to extend the swap agreement, and the Fed naturally seems to "shrink its balance sheet." However, this is actually good for risk assets and bad for the dollar. According to data on swap contracts that have continued to expire in recent weeks, unless demand for the US dollar suddenly resumes, trading volume and the Fed's balance sheet will continue to fall sharply.
At the same time, institutions predict that the euro is expected to strengthen further. The European Union reached an agreement on its 750 billion euro economic relief plan. Last week, the euro broke through a high of 1.15 against the US dollar. "The layout of the euro is still based on medium-term bulls as the main strategy, but the dollar may rebound in the short term. The current problems in the US economy determine the necessity of a'weak dollar', so a short-term rebound is not a signal that the dollar is strengthening. At present, the euro /USD may test 1.17." KVB PRIME special analyst Wu Zhen (Boris Wu) told reporters.
In addition, Robertson mentioned that the current US dollar bearish concerns are that emerging market central banks may not allow their currencies to appreciate against the US dollar for fear of declining trade competitiveness. However, the data shows that compared with developed countries, the export of emerging market countries is much less hit, so they have more room for currency appreciation. In April, exports from developed markets fell by 24.8% year-on-year, while exports from emerging markets fell by only 6.5%. Therefore, the agency believes that the Indonesian rupiah, Indian rupee, Thai baht, Philippine peso, Mexican peso and other emerging market currencies are expected to continue to rise against the US dollar.
RMB is expected to continue to strengthen
Despite the overall weakness of the US dollar in July, due to external uncertainties, the US dollar/CNH rose from 6.97 on July 22 to 7.03 last week. However, the fundamentals of the strengthening of the yuan have not changed.
As of 19:00 on July 29, Beijing time, the USD/CNH quoted 6.9989.
"The fundamentals of the RMB exchange rate are stable, and China's relative economic strength still supports the renminbi to remain strong, and the quarterly current account may turn into a surplus. In addition, the support for the renminbi from interest rate differentials continues." Robertson said.
In terms of interest rate differentials, the current Sino-US interest rate differential is approaching historical highs. The current 3-month SHIBOR (Shanghai Interbank Offered Rate) is about 200BP higher than the USD LIBOR (London Interbank Offered Rate) in the same period. At the same time, the real yield on U.S. Treasuries fell last week and is currently the lowest level since 2012. "We believe that the fundamentals of the United States have deteriorated, the reasons for not holding non-dollar currencies are beginning to weaken, and the bearish belief in the US dollar is increasing." Robertson said.
Coincidentally, Ji Tianhe, a foreign exchange and interest rate strategist at BNP Paribas, told reporters that the interest rate environment supports the renminbi to maintain its strength. "The peak period of monetary margin tightening has passed in the second quarter. However, due to the strong momentum of the stock market, the monetary environment may continue to tighten slowly and gradually. It is expected that the 7-day repo fixing rate will rise from the average of approximately 2.4% in August. As of December’s 2.7%, that is, the current 7-day repo rate (2.2%) and the 7-day standing lending facility SLF (3.2%) in the middle of the interest rate corridor, but this increase is still much lower than the fourth in 2016 In the quarter, the 7-day repurchase fixing interest rate rose by 100BP in 4 months."
Ji Tianhe believes: "Although the recent RMB trend is not strong, we do not think this is a substantial weakness, because on July 6, driven by the stock market rebound, the RMB has broken through the resistance level of 7.05, which is expected to increase with seasonal dividends. After the disturbance to the renminbi caused by foreign exchange purchase demand subsides in August, the renminbi will catch up with the gains of other emerging market currencies."
At present, France and Pakistan maintain their forecast of USD/RMB reaching 6.8 at the end of the year, and said it does not need to overreact to short-term disturbances. "Before the U.S. election, market volatility may intensify. This makes any attempt to switch between long and short positions very dangerous and may be useless for a long time. Therefore, we recommend a'quiet' strategy before the signal changes substantially. "Ji Tianhe said.
A shares continue to attract capital inflows
As the "weak dollar" market begins, the renminbi is expected to continue to strengthen, and funds continue to flow into China's capital market.
On July 29, the A-share market rose sharply. The Shanghai Composite Index rose 2.06%, and the Shenzhen Component Index rose 3.12%. The household appliances, electronics, pharmaceuticals and other industries saw the highest growth rate. The turnover of the two cities returned to above one trillion yuan. The northbound capital changed its net outflow pattern for several consecutive days, with a net inflow of 7.7 billion yuan.
After the plunge last Friday, the agency believes that despite the continued external disturbances, the overall A-share market is improving. The dominant factors in the second half of the year are economic fundamentals and profitability.
Jason S. Lui, head of Asia Pacific Equity and Derivatives Strategy for France and Pakistan, told reporters that changes in A shares before the end of this year will mainly depend on the degree of economic recovery and corporate profitability. Although A-shares rose sharply in early July, the overall valuation index is still about 50% lower than the 2015 high, and developed market stock indexes are generally at historical highs. According to Bloomberg data, the 12-month PE of the Shanghai and Shenzhen 300 Index is 14.1 times, while that of the S&P 500 Index is 22.6 times.
However, he also said that the industry's rotation may accelerate. "Recently, a large amount of capital has shifted from industries favored by foreign capital (such as consumer goods and IT) to more traditional industries (such as industry and materials). For example, from July 14 to 27, the net shares of the two largest liquor companies Sales accounted for 20% of the total. This also means that northbound funds are becoming more tactical and opportunistic."
Morgan Stanley Huaxin Fund told reporters that the valuation level of A-shares has been significantly restored, and the subsequent allocation will be more balanced, and more attention will be paid to segments with higher performance certainty. In the medium and long term, the market is still in the expectation of quarterly recovery of earnings and relatively sufficient liquidity. In the structural direction, we will continue to focus on high-quality consumption, technology leaders, and real estate, military industrial chain and optional consumption recovery.
As of July 27, a total of nearly 40% (1592) A-share listed companies have disclosed interim performance forecasts. In terms of sectors, the performance forecast disclosures of GEM companies and small and medium-sized companies have made rapid progress, with the disclosure ratios being 46% and 57%, respectively. The quarterly report showed a significant improvement, significantly higher than the main board. From an industry perspective, telecommunications, medical equipment and services, and semiconductors have the highest pre-happy rates, while optional consumption (consumer services and retail), media and entertainment, and transportation have the highest pre-loss rates.
Author: 4. Alina Cho