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Trillion dollar selling, dollar
After Powell spoke in Jackson Hole last Friday, the market almost completely digested the signal of interest rate cut in September. The dollar fell in response, hitting a one-year low last Friday.
Stephen Jen of Eurizon SLJ, a well-known proponent of the "dollar smile theory", said that the US interest rate cut or the return of US$ 1 trillion in China's capital prompted the RMB to appreciate by 10%, which triggered a heated discussion in the market.
At present, the US dollar index fluctuates between 100 and 101. Jen said that the dollar has recovered some of its decline this week, but the trend of selling dollars will not stop, and it may even turn into an "avalanche".
The depreciation of the dollar is likely to be nonlinear.
Stephen Jen believes that more and more dollar depositors are beginning to sell dollars. They have doubts about the status of the dollar as the world's de facto reserve currency and are nervous about the rising trade and budget deficit in the United States.
The high dollar deposit interest rate masks the deterioration of the internal quality of the dollar. The twin deficits (current account deficit and fiscal deficit) in the United States continues to expand and has reached a worrying level. The high interest rate on US dollar deposits has also attracted some funds originally invested in other currencies.
The large amount of dollar deposits held by these investors, with the interest rate cut by the Federal Reserve and the depreciation of the dollar, poses an "avalanche" risk to the dollar: the Federal Reserve may cut interest rates linearly, but the depreciation of the dollar is likely to be nonlinear.
Barclays' report also supports this view. The dollar has experienced the worst monthly depreciation since November last year, and the mood of the dollar has recently changed from "extremely bullish" to "extremely bearish".
The latest CFTC data also shows that speculators now hold long positions in international foreign exchange.
Are concerns about the depreciation of the dollar exaggerated?
Juckes of Socié té Gé né rale stressed that the strength of the dollar is largely due to the fact that global investors have been buying assets denominated in dollars for many years. This constant demand for dollar assets supports the value of the dollar.
In other words, if the dollar is to continue to weaken, the return on capital elsewhere needs to be improved.
If the Fed cuts interest rates less than expected, it may also lead to a reduction in the depreciation pressure of the US dollar and even a rebound.
Goldman Sachs analysts wrote in a report last week that "it is difficult to oppose shorting the dollar one month before the start of the interest rate cut cycle", but analysts still expect that the labor market data "will be strong enough for the Fed to adopt a more gradual policy path than the current pricing".
Structurally, we believe that it is unlikely that the Fed will significantly cut interest rates more than other global central banks.
The Fed's interest rate cut is accelerating, and other regions may have faster adjustment, especially considering the disappointing data of economic activities: PMI data in the euro zone show that restrictive policies are dragging down other economic activities besides the Olympic Games' boost to the French service industry.
Goldman Sachs also said that American assets are still attractive compared with those of other countries, because the short-term interest rate in the United States has a slight advantage compared with other countries, which supports the attractiveness of dollar assets.
In addition, the upcoming US election may increase the uncertainty of policies, thus inhibiting investors' enthusiasm for investment and further affecting the fluctuation of the US dollar exchange rate.
Risk warning and exemption clause
The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.