Sive Morten
Special Consultant to the FPA
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Fundamentals
It's summertime, and news stream becomes narrower. Besides, some news come in habit, and nobody surprising anymore with CPI fluctuations, PMI and other stuff. At the same time, this week, we evidently see that focus is changing. Usually we mostly talk about EUR and USD, but now China is taking primary role, as piking with the US is escalating. Since this is two largest global economies, their conflict hardly will pass unsigned for the World. More and more negative news come from China - developers' bankruptcies, yuan devaluation, deflation etc. But this is double-edged sword. Due to high level of US-China economies integration, they are mutually related and bad things in China sooner rather than later will hit US as well.
Among events that yet to happen, we have to mention coming Jackson Hole meeting where J. Powell could give more hints on US economy condition and Fed policy.
Market overview
The dollar was flat on Friday but set for a fifth consecutive week of gains in its longest winning streak for 15 months, buoyed by demand for safer assets on worries over China's economy and bets that U.S. interest rates will stay high. The People's Bank of China (PBOC) set a much stronger-than-expected daily fixing, lifting the yuan from a 9-month low hit on Thursday.
"The dollar continues to string together this rally," said Joe Manimbo, senior market analyst, at Convera. "With the U.S. economy holding up much better than expected, it's leading the market to push out the timeframe for when the Fed is likely to ease."
Minutes from the Federal Reserve's last meeting showed this week that most members of the rate-setting committee continued to see "significant upside risks to inflation". Strong economic data this week, particularly retail sales, also bolstered the case for additional tightening. The dollar also saw a boost as investors appeared concerned that Chinese authorities hadn't done enough to shore up the economy.
Treasury Secretary Janet Yellen made a robust pitch in the swing state of Nevada on Monday that President Joe Biden's policies are powering historic job growth and rebuilding competitiveness, despite polls showing Americans remain skeptical. Yellen underscored the importance of the climate-focused Inflation Reduction Act, which marks its anniversary on Wednesday, especially in a summer that has made headlines with record heat and climate change-related disasters.
Yellen said her visit to Nevada, a key battleground state in the 2024 presidential election, is part of a major push by Biden and his cabinet to promote the positive impact of the IRA and other policies that she said are boosting long-term growth and making the United States more resilient to future shocks.
The full impact won't be known until last year, when taxpayers claim tax creditrs, but a Treasury official said the private sector has announced over $110 billion in new clean- energy investments since the bill's passage a year ago.
The Commerce Department report showed retail sales grew 0.7% last month against expectations of a 0.4% rise, suggesting the U.S. economy remains strong. After the data, traders' bets of a pause on hikes by the Federal Reserve next month stayed intact at 89%, yet analysts said investors were worried rates could stay at current levels longer than anticipated. Banks saw the brunt of the selling as investors grew more anxious about interest rates.
Shares of U.S. banks dropped on Tuesday as the prospect of tighter regulations and a possible downgrade of several lenders by Fitch Ratings raised investor concerns over the health of the sector. A Fitch Ratings analyst warned that the agency could downgrade several large U.S. banks, weeks after rival Moody's cut the ratings of 10 mid-sized lenders, citing funding risks and weaker profitability.
An analyst at Fitch Ratings warned that U.S. banks, including JPMorgan Chase, could be downgraded if the agency further cuts its assessment of the operating environment for the industry, according to a report from CNBC on Tuesday. In June, Fitch lowered the score of the U.S. banking industry's "operating environment" to AA- from AA, citing pressure on the country's credit rating, gaps in regulatory framework and uncertainty about the future trajectory of interest rate hikes. Another one-notch downgrade, to A+ from AA-, would force Fitch to re-evaluate ratings on each of the more than 70 U.S. banks it covers, analyst Chris Wolfe told CNBC.
The U.S. Federal Reserve is likely done raising interest rates, according to a strong majority of economists polled by Reuters, and a slight majority now expect the central bank to wait at least through end-March before cutting them. A 90% majority, 99 of 110 economists, polled Aug 14-18 say the Fed will keep the federal funds rate in the 5.25-5.50% range at its September meeting, in line with market pricing. A roughly 80% majority expect no further rate rises this year.
That contrasts with minutes from policymakers' recent deliberations, showing a split on whether one more rise might be required. After raising rates by 25 basis points last month, Fed Chair Jerome Powell kept options open for whether there would be a hike or a pause at the September meeting.
23 (of 110) poll respondents said rates will rise once more this year, with two saying twice more, to 5.75-6.00%. While a majority among 95 economists who have forecasts through mid-2024 say rates will fall at least once by then, there is no majority for the timing of the first cut. Just over half, 48 of 95, said the Fed will hold off cutting rates through end-March, with another 45, or 47%, saying its first cut will come in Q1.
Building permits for apartments in Germany fell 27% during the first half of the year, the statistics office disclosed on Friday, underscoring a downturn in demand plaguing the construction and real estate industry. The nosedive in permits comes amid calls from firms and some politicians for stimulus from Berlin to support the industry ahead of a meeting next month with Chancellor Olaf Scholz. In recent weeks, a series of property developers have registered insolvency, while figures have shown a plunge in construction and residential property prices.
Germany is Europe's largest economy and the biggest real estate investment market on the continent. The property sector accounts for roughly a fifth of its economic output and one in ten jobs. Politicians, ministries and the property industry will convene with Chancellor Olaf Scholz on Sept. 25 to try to find solutions to the slump, and some are already jockeying with proposals to rejuvenate the sector. Weakness in the real estate space has also emerged in the United States, Sweden and China.
MOST INTERESTING STUFF
It is not surprising that most dynamic data now relates to Real Estate market as in the US as in China, and EU as it was shown above on Germany example. Recent legal initiatives from the US and China obviously shows mutual assets withdrawn. While US forbids investments in Chinese technology sector and indirectly calls to leave investment projects in China, the latter, in response accelerates selling US debt, burning reserves, to support national currency. This makes pressure on US domestic debt market, as China one of the largest holders of the US bonds.
Situation in Chinese economy becomes worse day by day, here are just few numbers:
Additionally we could say that Corporate bond defaults in China reached the highest level since the beginning of the year. Borrowers missed payments on domestic bonds totaling 7.5 billion yuan ($1 billion) in June and July, the worst two-month period since December and January last year. This is worrisome and keeps Bloomberg's China Credit Tracker stress score at 4.
As you know, Anxious Chinese retail investors are bombarding listed companies with questions about their exposure to Zhongrong International Trust Co after missed payments by the trust company triggered fears of contagion across the country's financial system. Zhongrong managed assets worth 785.7 billion yuan ($107.69 billion) at the end of 2022, out of which 629.3 billion yuan were linked to trust products, according to its latest annual report.
About two dozen protesters at Zhongrong International Trust Co. demanding payment for high-yield products that were presented as safe investments. In one of the videos posted online, a woman angrily asks, “Why is the company not giving us back the money? Your financial statements say there's a profit!!!"
China's economic troubles have deepened, with property developer China Evergrande seeking Chapter 15 protection in a U.S. bankruptcy court. Concerns are also growing over default risks in its shadow banking sector. The PBOC cut rates earlier this week in a surprise move that widened the yield gap against the U.S., rendering the yuan even more vulnerable to decline.
Also China faces biggest currency outflow since July 2022. ️According to Goldman, the net outflow of foreign exchange from China in July was about $26 billion, the fastest rate of outflow since September 2022. Hedge fund EDL Capital is betting on further falls for China's offshore currency and says the yuan's slide could be the next "black swan event" to rattle world markets, according to an investor presentation this month seen by Reuters.
EDL Capital, which manages about $1 billion, said factors weighing on the yuan include geopolitical tensions driving Western countries to re-home supply chains that will starve China of foreign investment.
China's central bank unexpectedly cut key policy rates for the second time in three months on Tuesday, in a fresh sign that the authorities are ramping up monetary easing efforts to boost a sputtering economic recovery. The central bank also injected 204 billion yuan through seven-day reverse repos while cutting borrowing costs by 10 basis points to 1.80% from 1.90% previously, it said in an online statement. China's yuan has lost about 5% against the dollar so far this year to become one of the worst performing Asian currencies.
At the same time, China doesn't give up and response with massive USD sell-off to support own currency. China's major state-owned banks were seen busy selling U.S. dollars to buy yuan in both onshore and offshore spot foreign exchange markets this week, people with direct knowledge of the matter said, in an attempt to slow the yuan's depreciation. Additionally The People's Bank of China has set a so-called fixing at 7.2006 per dollar, compared to an average estimate of 7.3047 in a Bloomberg survey. This is the largest gap in estimates since the survey began in 2018. Together with S. Arabia, China accelerates US debt selling.
Meantime, JP Morgan reports that Banks stop buying long-term US Bonds:
Fitch may downgrade China's sovereign credit rating. If China continues to pump money into the economy, then Fitch may again “think” about its sovereign rating, since the ratio of public debt to GDP of the country is “too high” for the current rating. James McCormack, Head of Fitch Ratings Sovereign Ratings, said this in an interview with Bloomberg TV.
So this is just brief walk over US-China confrontation acceleration. Fitch's attack " is being prepared outside. But inside, they are not sitting idly as well - civil activists demand the return of money to Zhongrong International Trust and generally create the necessary information noise.
But there is one problem - a lot of American money has been invested in China. And if you drop the rating of China, then after that, after a couple of iterations, you will have to revise the ratings within the United States for about a third of the companies in the financial sector, if not more. And there, and so everything is quite tense and without China. In general, this is not even a shot in the leg - it is possible to hit yourself in the head. We suggest that this is a part of the puzzle of AUKUS and coming formal war with China for Taiwan, but in reality for global domination.
If we keep aside, currency war, the deflation in China is positive for the West, because import becomes cheaper, slowing inflation in domestic economy. Deflationary pressures in China could spill over into global markets, which is potentially near-term good news for Western central banks as they seek to curb inflation, U.S. asset manager PIMCO said on Wednesday.
Oxford Economics said in a note on Wednesday that it had reduced its 2023 gross domestic product growth forecast for China to a below-consensus 5.1%.
"Deflation, weakening trade, collapsing loan demand, and a paralysed property sector dampen our risk appetite," it said.
But in the US the situation in Real Estate market hardly looks better. U.S. home builder confidence weakened in August for the first time this year, according to a report released Tuesday, as record-breaking mortgage rates and still-high housing prices discouraged prospective buyers. The National Association of Home Builders/Wells Fargo Housing Market Index retreated to 50 in August from a 13-month peak of 56 in July. Builder confidence was largely undermined by a drop in prospective buyer traffic, which fell to 34 in August from a year-long high of 40 in July. It is not surprising as Mortgage rate stands around 7.6% high. The share of mortgage debt in relation to real disposable income has reached very high positions:
The indicators of 2006-2007, when the sub-prime mortgage crisis occurred, were exceeded. Of course, 2008 is not a 2023, but the trend in which the growth of debt in relation to income is not going to stop, causes natural concerns. Second one is the picture of increase in savings of American households relative to the average level of previous years. As you can see, during the covid period, savings were growing, but they have been falling for the last two years. And the money accumulated during the quarantine period has almost run out.
Hardly situation will blow in nearest 1-2 months, but the vital point is not too far. In fact - households' savings are spent. Problems continue with the issuance of loans to physicists in the United States and this has two notable consequences. Firstly, credit card debt and delinquencies on them are growing. Apparently, the people somehow compensate for the non-issuance of ordinary loans. And banks do not want to give new loans, so people can't re-finance them.
CONCLUSION:
You may ask, guys, why we pay so much attention to China economy and what's going on there, how the US-China confrontation goes and so on. In fact, we do it by two reasons. First is, when two bigs' are fighting - nobody recalls about smalls'. It means that on a way of deterioration of global economy investors will keep demand for USD, forgetting about EUR, especially when situation will become worse and worse. We suggest that the US domestic financial rate policy is not free from geopolitics and mostly aimed on global political targets rather than on domestic inflation. In fact, it seems that the US is trying to repeat the defeat of JPY in 80s, when they has raised rate so far, that JPY has collapsed, triggering massive assets outflow and Japan economy growth stumbles. We've talked about this in one of our Gold market reports.
That's why, it is not correct, by our view to consider the US interest rate policy separately from geopolitical situation and from China confrontation in particular. Whatever will happen with the US inflation (although we think that it will start rising again soon), Interest rates is a geopolitical weapon and not the yuan but USD global reserve currency. When Chinese economy will be weakened enough, triggering deteriorating of living standards and social problems, the next, more active stage of confrontation could start - hot confrontation by AUKUS.
I suspect that this is the reason of recent Fed members comments, BofA opinion that 5% yield is a "new standard" etc. Taking it altogether, we come to conclusion that we should forget about US Dollar weakness in nearest time. This in turn, leads to couple of thoughts. First is, higher yields for longer term should keep domination of USD over EUR. Second, the jeopardy in global politics and economy will accelerate on rising US-China confrontation, which increases demand for safe haven assets and US Dollar in particular. EU economy is not out of the woods yet, and it seems that recent relief was temporal. These things suggest that long-term downside EUR/USD trend should continue, and our 0.9 target is still quite could be reached at some moment.
It's summertime, and news stream becomes narrower. Besides, some news come in habit, and nobody surprising anymore with CPI fluctuations, PMI and other stuff. At the same time, this week, we evidently see that focus is changing. Usually we mostly talk about EUR and USD, but now China is taking primary role, as piking with the US is escalating. Since this is two largest global economies, their conflict hardly will pass unsigned for the World. More and more negative news come from China - developers' bankruptcies, yuan devaluation, deflation etc. But this is double-edged sword. Due to high level of US-China economies integration, they are mutually related and bad things in China sooner rather than later will hit US as well.
Among events that yet to happen, we have to mention coming Jackson Hole meeting where J. Powell could give more hints on US economy condition and Fed policy.
Market overview
The dollar was flat on Friday but set for a fifth consecutive week of gains in its longest winning streak for 15 months, buoyed by demand for safer assets on worries over China's economy and bets that U.S. interest rates will stay high. The People's Bank of China (PBOC) set a much stronger-than-expected daily fixing, lifting the yuan from a 9-month low hit on Thursday.
"The dollar continues to string together this rally," said Joe Manimbo, senior market analyst, at Convera. "With the U.S. economy holding up much better than expected, it's leading the market to push out the timeframe for when the Fed is likely to ease."
Minutes from the Federal Reserve's last meeting showed this week that most members of the rate-setting committee continued to see "significant upside risks to inflation". Strong economic data this week, particularly retail sales, also bolstered the case for additional tightening. The dollar also saw a boost as investors appeared concerned that Chinese authorities hadn't done enough to shore up the economy.
Treasury Secretary Janet Yellen made a robust pitch in the swing state of Nevada on Monday that President Joe Biden's policies are powering historic job growth and rebuilding competitiveness, despite polls showing Americans remain skeptical. Yellen underscored the importance of the climate-focused Inflation Reduction Act, which marks its anniversary on Wednesday, especially in a summer that has made headlines with record heat and climate change-related disasters.
Yellen said her visit to Nevada, a key battleground state in the 2024 presidential election, is part of a major push by Biden and his cabinet to promote the positive impact of the IRA and other policies that she said are boosting long-term growth and making the United States more resilient to future shocks.
The full impact won't be known until last year, when taxpayers claim tax creditrs, but a Treasury official said the private sector has announced over $110 billion in new clean- energy investments since the bill's passage a year ago.
The Commerce Department report showed retail sales grew 0.7% last month against expectations of a 0.4% rise, suggesting the U.S. economy remains strong. After the data, traders' bets of a pause on hikes by the Federal Reserve next month stayed intact at 89%, yet analysts said investors were worried rates could stay at current levels longer than anticipated. Banks saw the brunt of the selling as investors grew more anxious about interest rates.
Shares of U.S. banks dropped on Tuesday as the prospect of tighter regulations and a possible downgrade of several lenders by Fitch Ratings raised investor concerns over the health of the sector. A Fitch Ratings analyst warned that the agency could downgrade several large U.S. banks, weeks after rival Moody's cut the ratings of 10 mid-sized lenders, citing funding risks and weaker profitability.
An analyst at Fitch Ratings warned that U.S. banks, including JPMorgan Chase, could be downgraded if the agency further cuts its assessment of the operating environment for the industry, according to a report from CNBC on Tuesday. In June, Fitch lowered the score of the U.S. banking industry's "operating environment" to AA- from AA, citing pressure on the country's credit rating, gaps in regulatory framework and uncertainty about the future trajectory of interest rate hikes. Another one-notch downgrade, to A+ from AA-, would force Fitch to re-evaluate ratings on each of the more than 70 U.S. banks it covers, analyst Chris Wolfe told CNBC.
The U.S. Federal Reserve is likely done raising interest rates, according to a strong majority of economists polled by Reuters, and a slight majority now expect the central bank to wait at least through end-March before cutting them. A 90% majority, 99 of 110 economists, polled Aug 14-18 say the Fed will keep the federal funds rate in the 5.25-5.50% range at its September meeting, in line with market pricing. A roughly 80% majority expect no further rate rises this year.
That contrasts with minutes from policymakers' recent deliberations, showing a split on whether one more rise might be required. After raising rates by 25 basis points last month, Fed Chair Jerome Powell kept options open for whether there would be a hike or a pause at the September meeting.
23 (of 110) poll respondents said rates will rise once more this year, with two saying twice more, to 5.75-6.00%. While a majority among 95 economists who have forecasts through mid-2024 say rates will fall at least once by then, there is no majority for the timing of the first cut. Just over half, 48 of 95, said the Fed will hold off cutting rates through end-March, with another 45, or 47%, saying its first cut will come in Q1.
Building permits for apartments in Germany fell 27% during the first half of the year, the statistics office disclosed on Friday, underscoring a downturn in demand plaguing the construction and real estate industry. The nosedive in permits comes amid calls from firms and some politicians for stimulus from Berlin to support the industry ahead of a meeting next month with Chancellor Olaf Scholz. In recent weeks, a series of property developers have registered insolvency, while figures have shown a plunge in construction and residential property prices.
Germany is Europe's largest economy and the biggest real estate investment market on the continent. The property sector accounts for roughly a fifth of its economic output and one in ten jobs. Politicians, ministries and the property industry will convene with Chancellor Olaf Scholz on Sept. 25 to try to find solutions to the slump, and some are already jockeying with proposals to rejuvenate the sector. Weakness in the real estate space has also emerged in the United States, Sweden and China.
MOST INTERESTING STUFF
It is not surprising that most dynamic data now relates to Real Estate market as in the US as in China, and EU as it was shown above on Germany example. Recent legal initiatives from the US and China obviously shows mutual assets withdrawn. While US forbids investments in Chinese technology sector and indirectly calls to leave investment projects in China, the latter, in response accelerates selling US debt, burning reserves, to support national currency. This makes pressure on US domestic debt market, as China one of the largest holders of the US bonds.
Situation in Chinese economy becomes worse day by day, here are just few numbers:
Additionally we could say that Corporate bond defaults in China reached the highest level since the beginning of the year. Borrowers missed payments on domestic bonds totaling 7.5 billion yuan ($1 billion) in June and July, the worst two-month period since December and January last year. This is worrisome and keeps Bloomberg's China Credit Tracker stress score at 4.
As you know, Anxious Chinese retail investors are bombarding listed companies with questions about their exposure to Zhongrong International Trust Co after missed payments by the trust company triggered fears of contagion across the country's financial system. Zhongrong managed assets worth 785.7 billion yuan ($107.69 billion) at the end of 2022, out of which 629.3 billion yuan were linked to trust products, according to its latest annual report.
About two dozen protesters at Zhongrong International Trust Co. demanding payment for high-yield products that were presented as safe investments. In one of the videos posted online, a woman angrily asks, “Why is the company not giving us back the money? Your financial statements say there's a profit!!!"
China's economic troubles have deepened, with property developer China Evergrande seeking Chapter 15 protection in a U.S. bankruptcy court. Concerns are also growing over default risks in its shadow banking sector. The PBOC cut rates earlier this week in a surprise move that widened the yield gap against the U.S., rendering the yuan even more vulnerable to decline.
Also China faces biggest currency outflow since July 2022. ️According to Goldman, the net outflow of foreign exchange from China in July was about $26 billion, the fastest rate of outflow since September 2022. Hedge fund EDL Capital is betting on further falls for China's offshore currency and says the yuan's slide could be the next "black swan event" to rattle world markets, according to an investor presentation this month seen by Reuters.
EDL Capital, which manages about $1 billion, said factors weighing on the yuan include geopolitical tensions driving Western countries to re-home supply chains that will starve China of foreign investment.
China's central bank unexpectedly cut key policy rates for the second time in three months on Tuesday, in a fresh sign that the authorities are ramping up monetary easing efforts to boost a sputtering economic recovery. The central bank also injected 204 billion yuan through seven-day reverse repos while cutting borrowing costs by 10 basis points to 1.80% from 1.90% previously, it said in an online statement. China's yuan has lost about 5% against the dollar so far this year to become one of the worst performing Asian currencies.
At the same time, China doesn't give up and response with massive USD sell-off to support own currency. China's major state-owned banks were seen busy selling U.S. dollars to buy yuan in both onshore and offshore spot foreign exchange markets this week, people with direct knowledge of the matter said, in an attempt to slow the yuan's depreciation. Additionally The People's Bank of China has set a so-called fixing at 7.2006 per dollar, compared to an average estimate of 7.3047 in a Bloomberg survey. This is the largest gap in estimates since the survey began in 2018. Together with S. Arabia, China accelerates US debt selling.
Meantime, JP Morgan reports that Banks stop buying long-term US Bonds:
Fitch may downgrade China's sovereign credit rating. If China continues to pump money into the economy, then Fitch may again “think” about its sovereign rating, since the ratio of public debt to GDP of the country is “too high” for the current rating. James McCormack, Head of Fitch Ratings Sovereign Ratings, said this in an interview with Bloomberg TV.
So this is just brief walk over US-China confrontation acceleration. Fitch's attack " is being prepared outside. But inside, they are not sitting idly as well - civil activists demand the return of money to Zhongrong International Trust and generally create the necessary information noise.
But there is one problem - a lot of American money has been invested in China. And if you drop the rating of China, then after that, after a couple of iterations, you will have to revise the ratings within the United States for about a third of the companies in the financial sector, if not more. And there, and so everything is quite tense and without China. In general, this is not even a shot in the leg - it is possible to hit yourself in the head. We suggest that this is a part of the puzzle of AUKUS and coming formal war with China for Taiwan, but in reality for global domination.
If we keep aside, currency war, the deflation in China is positive for the West, because import becomes cheaper, slowing inflation in domestic economy. Deflationary pressures in China could spill over into global markets, which is potentially near-term good news for Western central banks as they seek to curb inflation, U.S. asset manager PIMCO said on Wednesday.
Oxford Economics said in a note on Wednesday that it had reduced its 2023 gross domestic product growth forecast for China to a below-consensus 5.1%.
"Deflation, weakening trade, collapsing loan demand, and a paralysed property sector dampen our risk appetite," it said.
But in the US the situation in Real Estate market hardly looks better. U.S. home builder confidence weakened in August for the first time this year, according to a report released Tuesday, as record-breaking mortgage rates and still-high housing prices discouraged prospective buyers. The National Association of Home Builders/Wells Fargo Housing Market Index retreated to 50 in August from a 13-month peak of 56 in July. Builder confidence was largely undermined by a drop in prospective buyer traffic, which fell to 34 in August from a year-long high of 40 in July. It is not surprising as Mortgage rate stands around 7.6% high. The share of mortgage debt in relation to real disposable income has reached very high positions:
The indicators of 2006-2007, when the sub-prime mortgage crisis occurred, were exceeded. Of course, 2008 is not a 2023, but the trend in which the growth of debt in relation to income is not going to stop, causes natural concerns. Second one is the picture of increase in savings of American households relative to the average level of previous years. As you can see, during the covid period, savings were growing, but they have been falling for the last two years. And the money accumulated during the quarantine period has almost run out.
Hardly situation will blow in nearest 1-2 months, but the vital point is not too far. In fact - households' savings are spent. Problems continue with the issuance of loans to physicists in the United States and this has two notable consequences. Firstly, credit card debt and delinquencies on them are growing. Apparently, the people somehow compensate for the non-issuance of ordinary loans. And banks do not want to give new loans, so people can't re-finance them.
CONCLUSION:
You may ask, guys, why we pay so much attention to China economy and what's going on there, how the US-China confrontation goes and so on. In fact, we do it by two reasons. First is, when two bigs' are fighting - nobody recalls about smalls'. It means that on a way of deterioration of global economy investors will keep demand for USD, forgetting about EUR, especially when situation will become worse and worse. We suggest that the US domestic financial rate policy is not free from geopolitics and mostly aimed on global political targets rather than on domestic inflation. In fact, it seems that the US is trying to repeat the defeat of JPY in 80s, when they has raised rate so far, that JPY has collapsed, triggering massive assets outflow and Japan economy growth stumbles. We've talked about this in one of our Gold market reports.
That's why, it is not correct, by our view to consider the US interest rate policy separately from geopolitical situation and from China confrontation in particular. Whatever will happen with the US inflation (although we think that it will start rising again soon), Interest rates is a geopolitical weapon and not the yuan but USD global reserve currency. When Chinese economy will be weakened enough, triggering deteriorating of living standards and social problems, the next, more active stage of confrontation could start - hot confrontation by AUKUS.
I suspect that this is the reason of recent Fed members comments, BofA opinion that 5% yield is a "new standard" etc. Taking it altogether, we come to conclusion that we should forget about US Dollar weakness in nearest time. This in turn, leads to couple of thoughts. First is, higher yields for longer term should keep domination of USD over EUR. Second, the jeopardy in global politics and economy will accelerate on rising US-China confrontation, which increases demand for safe haven assets and US Dollar in particular. EU economy is not out of the woods yet, and it seems that recent relief was temporal. These things suggest that long-term downside EUR/USD trend should continue, and our 0.9 target is still quite could be reached at some moment.
