Dollars, flip the table

Original Liu Xiaobo

The Federal Reserve's latest speech on U.S. inflation and interest rates has set off a wave of global financial volatility.

On April 16, local time, Federal Reserve Chairman Jerome Powell said at an economic forum that it may take longer to have enough confidence in cutting interest rates.

Powell said that the Fed has not made more progress in fighting inflation since the rapid decline in US inflation at the end of last year, and that the Fed can keep interest rates unchanged "for as long as necessary" if price pressures persist. Powell also said: "The recent data clearly does not give us greater confidence, on the contrary, it suggests that it may take longer than expected to achieve that confidence." ”

Fed Vice Chair Jefferson also said on the same day that the Fed is prepared to continue tightening monetary policy if inflation fails to slow as expected.

The latest statements by two senior officials of the Federal Reserve have had a "table-lifting" effect on the global financial market and produced a huge shock wave.

First of all, the dollar index hit a new recent high, breaking through 106 points.

The U.S. dollar index hit a new high, which translates to the fact that the dollar exchange rate has become stronger.

Because interest rate cuts are far away. Interest rates are the price of a currency, and a cut in an interest rate will cause the exchange rate to fall, while a failure to cut an interest rate will allow the exchange rate to rebound.

The chart below shows the U.S. dollar's exchange rate against the euro, the world's second-largest currency, which has seen a recent back-to-back rally.

The chart below shows the exchange rate of the US dollar against the British pound, which is also rising.

The U.S. dollar has also hit a new recent high against the Japanese yen and is approaching 155 yen per dollar. If the yen does not raise interest rates in the near future, I am afraid that the situation will be even worse.

The South Korean won has also depreciated sharply against the dollar, once exceeding 1,400 won to 1 dollar.

In this wave of sharp fluctuations in exchange rates, the currencies of Indonesia, Poland, Peru and other countries are also in danger.

For example, the rupiah fell below the 16,000 yuan to 1 dollar mark on April 16, hitting a four-year low against the dollar.

The Fed's latest statement also triggered a rally in US 10-year Treasury yields, hitting new recent highs:

As you can see from the chart above, the US 10-year Treasury yield briefly broke through 4.7% yesterday.

U.S. stocks fell for 3 consecutive days. The chart below shows the trend of the S&P 500.

Why did the Fed's latest statement cause such a big stir?

It has to do with the current international turmoil, such as the latest conflict between Israel and Iran, as well as the upcoming new economic sanctions. At this time, there is a general demand for hedging in international hot money. In the previous period, safe-haven demand was mainly concentrated in gold, and now it is starting to flow back to the dollar.

Since the dollar is not in a hurry to cut interest rates, then hold the dollar first.

However, the interesting thing is that the international gold price has not pulled back significantly, and the trend is still good.

Perhaps, this has something to do with the fact that there is too much money for hedging needs. However, the strength of the US dollar is not conducive to the trend of gold in the coming period.

Today there is news that the Russian Ministry of Finance is considering the removal of tariffs on gold exports, with the aim of stimulating gold exports. Russia, a major gold producer, accounts for about 10% of global gold production, and has recently been selling gold at a 99% discount to the international gold price in exchange for necessary foreign exchange.

The renminbi exchange rate performed well, although the offshore renminbi also depreciated to 7.28 yuan to 1 dollar, but then returned to around 7.26.

Why is the exchange rate of the renminbi stronger than that of the euro, the British pound, the yen, and the South Korean won? It may have something to do with Yellen's recent visit, or it may have something to do with Fitch's downward adjustment -- whether it is the easing of Sino-US relations or the defense of RMB assets, the current exchange rate is stable. Of course, the lack of a rate cut this month is also a reason. Yellen + Fitch is also good for understanding the recent direction of China's interest rates.

By the way, today (April 17), Fitch's second blow came:

In short, the US dollar postponed the rate cut, which allowed China to also postpone the rate cut. The price is that A-shares once again launched a 3,000-point defense battle.

The reasons for the recent decline in A-shares are complex. There are factors such as the Federal Reserve's postponement of interest rate cuts, which has suppressed China's monetary policy space; there are also factors that have strengthened supervision and regulations after the promulgation of the nine new articles, and some vested interests in the securities market have been "moved to the cake"; in addition, there are also worries about the new rules; and the continued cold property market is also a factor.

Why is this round of inflation in the United States so stubborn? After continuously raising interest rates and shrinking its balance sheet, it still cannot be contained?

The main reasons are as follows:

First, the scale of the post-epidemic coin is too large, and the U.S. money printing rate (M2 year-on-year growth rate) once reached 25%, close to China's 2009 "four trillion" flood. This is epic for a developed country. So, the inflation it creates is very difficult to manage and will take enough time. If you continue to read my column, you should remember that I recommended that the Fed raise interest rates at least six months in advance, and that Powell made the mistake of "starting too late" in raising interest rates.

Second, in the past few years of the epidemic, the United States has started a new round of technological revolution, mainly in artificial intelligence, new energy vehicles, life science and technology, etc. This has a more obvious effect on the economy, which can be seen from the long bull in the capital market.

Third, the U.S. "containment" trade policy toward China has also made it more difficult to control inflation in the U.S. Biden has tried to reduce tariffs on Chinese goods exported to the United States several times, but under the influence of domestic party disputes, he has ended up in vain. China's exports to the United States have decreased, and some of them have to go through Vietnam and Mexico, and of course prices will rise.

Of course, this is also a boomerang. The U.S. imposed tariffs on Chinese goods, making it difficult to manage its own inflation and forcing it to postpone interest rate cuts, which in turn affected China's monetary policy space and made the road to economic recovery more tortuous. This is probably what the official often says, "a trade war (or decoupling) is not good for anyone".

But this state of trade war and semi-decoupling will continue. For example, the United States and Europe have begun to take action against China's "new three things", and they have also begun to set up barriers to China's cross-border e-commerce.