In the past month, emerging markets including Mexico, India and Brazil all raised market interest rates. The yield of 10-year government bonds in these countries has risen sharply, generally by about 50 basis points.
On the other hand, in the United States, the interest rate of 10 US debt is close to 3%, 5-year is close to 2.8%, and 2-year is close to 2.5%, which is much higher than European debt and Japanese debt. This is a manifestation of the recent further strengthening of US debt.
What makes the world "suffocate" is that the dollar rose like a rainbow, hitting a new high in the second half of the year, and the expectation of the Fed to raise interest rates again added fuel to the fire. The expansion of relative spreads further enhances the attractiveness of the dollar.
Obviously, if the dollar continues to appreciate, it will be a "triple blow" to emerging market currencies around the world. The exchange rate will depreciate, interest rates will rise, and the price of risky assets will fall. Facing the potential crisis, emerging markets need to show greater courage and further raise market interest rates. If they run counter to this, they need to be prepared for the rapid consumption of foreign exchange reserves.
Heavyweights fluctuate: dollar assets become more attractive
The proportion of countries pegged to the US dollar in the world is above 50%. It can be seen that dollar pricing is still the main way in the world, and the Federal Reserve is also a well-deserved "central bank" in the world.
At present, the interest rate of 10 US debt is close to 3%, 5-year is close to 2.8%, and 2-year is close to 2.5%, which is much higher than European debt and Japanese debt. The expansion of relative spreads has enhanced the attractiveness of the dollar. The upward trend of the dollar is more obvious.
Universal influence: the overall adjustment of exchange rates in emerging markets around the world
With the contraction of the Federal Reserve and the rise of the yield of long-term government bonds, the "dollar shortage" in the global capital market continues to spread, and the currency and financial markets of emerging market countries are undergoing severe tests.
As can be seen from the above figure, in the last month, the biggest decline against the US dollar came from emerging market countries, including Mexico, Russia, Brazil and South Africa. Among them, the biggest decline was that the Mexican peso plummeted by about 6.7%; In the past week alone, the Turkish lira once plunged more than 6%.
Judging from the weekly decline, Mexican peso, Indian Rupee, Brazilian real and Korean won were among the top losers. Among them, Mexico's weekly decline reached 3.25%.
Most affected: Argentina and Turkey are special country risks.
Interestingly, Argentina's exchange rate decline is not particularly high in the ranking. However, the "double blow" that Argentina experienced last week was the most intense market performance of the "shock wave" of the US dollar interest rate hike. At present, Argentine President mauricio macri said that he has started negotiations with the International Monetary Fund (IMF) on flexible loans.
However, the Argentine peso has been falling for a long time, especially since 20 18, and the decline has increased, resulting in the lack of confidence of international investors and the increase of capital outflow. As can be seen from the above figure, the Argentine peso has been depreciating against the US dollar, from 15.4 in July of 20 17 to 17 at the end of 20 17, and then to 22.4 today.
Last week, after the peso hit a historical closing low of 22.40 against the US dollar, Argentina raised its benchmark interest rate to 40%, while reducing its fiscal deficit target from 3.2% equivalent to GDP to 2.7%. 40%, this level is surprising, but throughout history, the previous high point of Argentine policy interest rate reached 38% in March 20 16. Nothing particularly unusual.
Comparing the above two figures, Argentina's policy interest rate also bottomed out in July of 20 17 and climbed all the way. At the same time, according to the yield of Argentine 10-year bonds, the yield has been rising from 1.7% since 20 17 years, but the exchange rate has continued to rise. However, the capital loss is still large and the market confidence is lost.
The situation in Argentina is basically similar to that in Turkey. Market interest rates continued to rise, but the exchange rate plummeted, and the exchange rate of the Turkish lira against the US dollar also fell by 5.3% in the past month. The fundamental reason is not the interest rate issue, but the market's loss of confidence in the country's development.
Subsequent impact: Market interest rates in more emerging markets began to climb.
In the last month, emerging market countries with the largest decline against the US dollar currency include Mexico, Russia, Brazil and South Africa. There is a * * * feature, that is, before April, the yield of 10-year government bonds continued to decline, with obvious signs of easing. After April, the yield of 10-year government bonds increased obviously.
As can be seen from the above figure, the yield spreads of emerging markets relative to the US 10 national debt are relatively large. Considering the possibility that the Federal Reserve will raise interest rates again in May, emerging markets need to make greater efforts in raising interest rates to prevent capital outflows and maintain monetary stability.
Of course, in the process of raising interest rates, if the asset price bubbles in these countries are serious, it will be greatly affected. In addition, if these balance of payments deficits increase, the impact of domestic asset prices will further increase. If interest rates are not raised, domestic inflationary pressure will rise further. From this perspective, countries with relatively high debts such as Brazil and India are facing greater impacts.
Look at China: How long will the "flood control dam" of China Foreign Reserve last?
Once there is a large-scale exchange rate adjustment in emerging markets around the world, it is difficult for China to be immune to it. However, compared with other emerging markets, China's foreign exchange reserves have reached 3 trillion, and exchange rate fluctuations are relatively stable.
However, judging from the yield of 10-year treasury bonds, the same problem has also occurred in China, and there are obvious signs of loose market funds this year. However, under the pressure of the appreciation of the US dollar, the yield of US bonds rose, but the increase rate was only equivalent to that of South Africa. The continuous interest rate hike by the Federal Reserve has also greatly limited China's room for further easing.
As far as the Hong Kong dollar is concerned, the rise in the interest rate of the Hong Kong dollar is even more obvious. On April 12, the Hong Kong dollar hit a weak exchange rate protection of 7.85 against the US dollar, the weakest level since Hong Kong introduced the linked exchange rate system. In order to defend the value of the Hong Kong dollar, the Hong Kong Monetary Authority offered to sell the Hong Kong dollar several times and buy 51300 million Hong Kong dollars in eight days.
On May 4th, HSBC announced that it would raise the interest rate on Hong Kong dollar deposits from 0.00 1% to 0. 1% with immediate effect.
After HSBC raises the deposit interest rate, other banks in Hong Kong will also take action. The next step is to raise the deposit interest rate in Hong Kong dollars. From money market interest rate to credit market interest rate, the upward trend of Hong Kong dollar interest rate is gradually clear.
Obviously, if the dollar continues to appreciate, it will be a "triple blow" to emerging market currencies around the world. The exchange rate will depreciate, interest rates will rise, and the price of risky assets will fall. Facing the potential crisis, emerging markets need to show greater courage and further raise market interest rates. If they run counter to this, they need to be prepared for the rapid consumption of foreign exchange reserves.
Extended reading
What's the impact on China when the US dollar soars and Argentina collapses?
Source: (ID: Xiaoming _ qin)
Author: Qin Xiaoming
Since April, the biggest feature of the global macro-economy is two words:
Expand and rise.
The former refers to the soaring crude oil price, while the latter refers to the soaring US dollar index. The sharp rise in crude oil prices is usually closely related to inflation, so the sharp rise in oil prices can be summarized by the word "inflation", which is actually a fact that global financial markets have started trading.
Today, I will talk to you about the "rise" of the US dollar index and oil prices. Dig a hole first, and then fill it in.
1
What is the dollar index?
Let me briefly talk about science, what is the dollar index. Refers to the change of the exchange rate of the US dollar against a basket of currencies, which is used to comprehensively reflect the strength of the US dollar. The specific composition is as follows:
Simple common sense, there is no RMB in the US dollar index. As for the reasons, as we all know, the RMB has not even been freely convertible, so it is not surprising that the US dollar index does not refer to CNY.
2
The return of the king of the dollar index
The US dollar index began in June last year 165438+ 10, and first plunged from the stage high of 95 to the lowest near 88. Then it began to launch a counterattack in February this year, especially in April, which soared to 93, an increase of 5.7%.
A common sense is that you should not compare the fluctuation range of foreign exchange and stocks. The fluctuation range of the foreign exchange market 1% is already very large. Transactions in the foreign exchange market are usually leveraged transactions, which are common in the black market.
Many students in the foreign exchange market are embarrassed, because shorting dollars has become the most fashionable and crowded transaction since the end of last year. After only two or three months, the market began to reverse rapidly, especially in the last three weeks. It is no exaggeration to say that it is a dollar short-selling massacre.
By the way, we have seen many stampedes after this crowded transaction quickly reversed after reaching its peak:
20 17, 12, do multi-bitcoin transactions,
2065438+2008 1 Short China bond market,
2065438+February 2008, traded in many stock markets around the world.
2065438+After the RRR cut in April 2008, we continued to do more transactions in the China bond market.
……
What these transactions have in common is that they were very crowded before the reversal, and the market expectations reached an unprecedented consistency. Then the price quickly reversed under the action of reflexivity, because it happened so fast that many participants had no time to leave. The stampede accident, in turn, intensified the reversal trend. This is a very interesting phenomenon. You can pull out the above trading strategy and experience it with your heart.
This tells us a simple truth: the consensus expectation of the market is often wrong.
three
A simple framework for understanding exchange rates
To understand the exchange rate problem, we must have a basic knowledge of interest rate parity as the background.
Simply put, at the moment, countries with high interest rates can attract more money to earn high interest rates (this can be easily understood), while countries with low interest rates will face capital outflows, so that the currencies of countries with high interest rates appreciate and those with low interest rates depreciate.
Such as country a and country B.
The current situation is that the interest rate in country A is 5%, the interest rate in country B is 3%, and the spread is 2%.
The current exchange rate is 2: 1, that is, 1 yuan, the currency of country B can be exchanged for the currency of country A in 2 yuan.
100 Yuan Country A currency, country A interest 5 yuan, country B interest 1.5 yuan country B currency, equivalent to 3 yuan country A currency. ..
At this time, country B raises interest rates, the interest rate is raised to 4%, and the spread is reduced to 1%.
At this time, the currency of 100 yuan in country A can only get 5 yuan interest, but after changing into the currency of country B, you can get the currency of 2 yuan in country B, which is 0.5 more than that of 1.5 yuan in the previous equilibrium.
Under such changes, some funds will flow into country B in pursuit of extra 0.5 yuan interest, so the demand for country B's currency will increase, and the price (exchange rate) of country B's currency will rise, that is, the currency of country B will appreciate.
There are two questions here:
First, we should pay attention to the marginal change of interest rate, and the more accurate indicator is the marginal change of interest rate spread;
Secondly, it should be noted that the appreciation and depreciation of this currency are immediate, and the medium-term exchange rate trend is affected by arbitrage swap transactions, while the longer-term exchange rate depends on the fundamentals of the economy. But traders in the market usually only focus on short-term changes.
In fact, besides exchange rate parity, there is also a very important purchasing power parity theory to explain the exchange rate problem. It is an enlightening perspective to observe asset price bubbles (such as housing prices in China) under this theory. Coincidentally, it is also the content of the training camp.
four
The logic of this round of dollar appreciation
Reiterate a general logic of financial market pricing mentioned a long time ago:
Based on expectations, the prices of all financial assets are based on market expectations for the future. The essence of financial market trading is trading the future, or trading time.
Then let's look at the logic of the current rapid rebound of the US dollar index. I think there are four main points:
1) the marginal intensity of domestic inflation expectations in the United States led to a rapid rise in yields.
The main logic of the US 10 national debt yield quickly exceeding 3% is driven by the marginal intensity of inflation expectations, and the change of inflation expectations is roughly related to the skyrocketing oil prices and the tax reduction plan, which will be discussed later. The strong yield of 10Y means that the overall yield of US dollar assets will rise, which will attract the return of US dollars.
2) The process of peripheral economies withdrawing from monetary easing is less than expected.
The global economy is affected by uncertain factors such as soaring oil prices (and inflation concerns), Sino-US trade confrontation and geopolitics in the Middle East, and its growth momentum is weakened. The most typical ones are Europe and Japan. In the latest interest rate resolutions, they all released a slower pace than expected to end loose monetary policy.
At the end of last year, the US dollar index plummeted. At that time, the central banks of Europe and Japan all said that the economy was very strong and they were ready to withdraw from the easing policy. Therefore, the market generally interprets that monetary tightening in Europe and Japan is coming.
However, the latest monetary authorities issued a statement and severely hit the market in the face (of course, they also hit themselves in the face, which doesn't matter. It's normal to get hit in the face in the financial market. At this time, the soaring dollar is also a revision of optimistic expectations for Europe and Japan at the end of last year.
To put it bluntly, everyone thought that the currencies of Europe and Japan would decrease, interest rates would go up and spreads would narrow, so they threw dollars first. Now I find that I made a mistake and got hit in the face, so I bought back the dollars.
If women are the second fickle, then the first fickle is the financial market.
3) Trump's support rate rebounded.
In fact, since Trump was elected president of the United States, financial markets have always regarded him as an important pricing factor. From the previous "Trump deal" to the later "selling Trump", the political confidence conveyed by Trump's support rate in the United States is a very important factor affecting the trend of the capital market in the United States and even the world.
The current strong rebound of the US dollar index is not unrelated to Trump's regaining public support through a series of domestic and foreign policies since 20 18. Obviously, if people expect Trump to bring positive changes to the United States, then a stronger dollar is also reasonable.
The red line indicates opposition and the black line indicates support. Source: RealClear politics.
4) short trampling.
This is a technical reason. As mentioned above, shorting the US dollar was a very crowded and popular transaction before, but now the situation has turned sharply, and the stampede caused by short-term stop-loss liquidation has also contributed to the current surge in the US dollar index.
five
Global influence
I won't discuss the influence part, the most important basic logic.
A strong dollar will give the United States an advantage in the global "capital competition" game. That is to accelerate the flow of funds to the United States, especially those withdrawn from emerging markets.
The most typical case is now Argentina.
According to the information in the open market, the dollar/Argentine peso has risen by nearly 22% this year (that is to say, Argentina's currency has depreciated by 22%), and capital has flowed out of Argentina crazily. President Malsy had to turn to the International Monetary Fund for help.
Before asking for help, the Argentine central bank had raised interest rates three times in a row within 10 days, raising the interest rate from 32.5% to 40%, but it was useless, and the market was still selling the Argentine peso crazily.
In addition to Argentina, the US dollar/Turkish lira has appreciated by 13% and the US dollar/Indian Rupee has also appreciated by 5% this year.
This shows that the currencies of emerging market countries are generally facing depreciation pressure.
What about China?
China is the largest emerging market country, and the RMB naturally belongs to Alexandria. Take a look at the recent CNY trend. Since April, the onshore RMB has depreciated from 6.24 to 6.38, with a depreciation rate of 2.2%.
The continued strength of the US dollar is obviously unfavorable to the RMB. Fortunately, we have the "institutional advantage" of capital control. But don't think that everything will be fine with it, and profit-seeking capital can always break through the restrictions.
In addition, the greater the depreciation pressure, the greater the pressure to maintain the asset bubble denominated in local currency. This logic goes without saying.