The market ultimately chose "Strong Dollar"

The yield on the 10-year U.S. Treasury bonds suddenly rose overnight, breaking through the 4.3% mark. Along with the rise in interest rates, the U.S. dollar exchange rate also began to significantly strengthen, leading the Japanese yen to fall below the 160 mark, and the offshore Chinese yuan also briefly fell below 7.30. The occurrence of this series of events was quite sudden, with the sudden rise in U.S. bond yields related to the significantly higher-than-expected Australian inflation announced early Wednesday morning.

The Australian CPI inflation rate for May, announced yesterday, was 4.0% year-on-year, significantly higher than the market's expectation of 3.8% and the previous value of 3.6%. After the release of such data, the market immediately reversed its bets on an interest rate cut in Australia this year, and even began to consider the possibility of a rate hike by the Reserve Bank of Australia, leading to the sudden rise in long-term interest rates.

The U.S. bond yields also began to significantly rise overnight, which is worth further tracking, as there were no major data releases overnight, and the only data released on new home sales was significantly below expectations. In this context, the rise in long-term interest rates also indicates that bond traders are keenly pricing in some new variables. At the same time, the U.S. dollar index rebounded earlier than U.S. bonds, seemingly signaling a change in market pricing logic.

Looking at the trends of U.S. bonds and the U.S. dollar, U.S. bonds initially served as a safe haven during political storms, thus their yields were suppressed. However, even with the demand for safe havens, it seems that inflation concerns cannot completely mask the global rise in interest rates.

The continuous rise in the U.S. dollar index has put significant pressure on other currencies. The result of these series of events indicates that the market ultimately chooses a strong U.S. dollar. Looking at the seasonal trends of the past 5 years, the U.S. dollar index often performs strongly in the third quarter and relatively weakly in the fourth quarter. As we approach the third quarter of 2024, will the market once again follow the same path? Let's wait and see.

Main Text

The yield on the 10-year U.S. Treasury bonds suddenly rose overnight, breaking through the 4.3% mark. Along with the rise in interest rates, the U.S. dollar exchange rate also began to significantly strengthen, leading the Japanese yen to fall below 160, and the offshore Chinese yuan also briefly fell below 7.30. The occurrence of this series of events was quite sudden, with the sudden rise in U.S. bond yields related to the significantly higher-than-expected Australian inflation announced early Wednesday morning.

The Australian CPI inflation rate for May, announced yesterday, was 4.0% year-on-year, significantly higher than the market's expectation of 3.8% and the previous value of 3.6%. After the release of such data, the market immediately reversed its bets on an interest rate cut in Australia this year, and even began to consider the possibility of a rate hike by the Reserve Bank of Australia, leading to the sudden rise in long-term interest rates. Taking the Australian 10-year government bond yield as an example, it rose by 20 basis points in the past two trading days. It is worth mentioning that most analysts previously believed that the next step for the Reserve Bank of Australia would be to cut interest rates or at least not raise them. The camp advocating for a rate hike was in the minority, but yesterday's market changes seem to indicate that the rate hike camp is gradually gaining more prominence. Whether such changes will affect other markets is also worth our further attention The US Treasury bond yields also began to rise significantly overnight, which is worth further tracking as there were no major data releases overnight, and the only released new home sales data was significantly below expectations. In this context, the rise in long-term interest rates also means that bond traders are starting to keenly price in some new variables.

At the same time, the US Dollar Index rebounded earlier than the US Treasury bonds, indicating a change in market pricing logic. The earliest reason for the rise in the US dollar was the political turmoil in the European region, with the French presidential election set to begin this Sunday. If the far-right populist party National Rally (Rassemblement National, RN) in France gains more seats than expected in the election, political uncertainty in France may intensify.

Looking at the trends of US Treasury bonds and the US dollar together, US Treasury bonds initially served as a safe haven during political storms, thus their yields were suppressed. However, even with the demand for safe-haven assets, it seems that it cannot completely mask the global rise in interest rates brought about by inflation concerns.

The US Dollar Index continues to climb, exerting significant pressure on other currencies. The Japanese yen exchange rate once widened its decline to 0.6%, reaching 160.82 yen to 1 US dollar, the lowest level since 1986, falling below the exchange rate level when the Bank of Japan intervened in April this year.

The weakening of the Japanese yen is mainly influenced by two factors: first, the Bank of Japan has not taken any substantial tightening measures after the first rate hike; second, the Federal Reserve's decision to hold interest rates steady further increases pressure on the yen exchange rate. Currently, market institutions estimate that Japan has approximately $200 billion to $300 billion available for future currency intervention actions. If the short-term USD/JPY exchange rate falls below the key psychological level of 162-163, the Japanese Ministry of Finance may intervene in the market again to stabilize the yen exchange rate and reduce instability.

However, regardless of the outcome of these events, it signifies that the market ultimately chooses a strong US dollar. Looking at the seasonal trends of the past 5 years, the US Dollar Index tends to perform strongly in the third quarter and relatively weaker in the fourth quarter. As we approach the third quarter of 2024, will the market fall into the same pattern again? Let's wait and see.

Author: Zhou Hao, Sun Yingchao; Source: Guojun Overseas Macro Research; Original Title: "The Market Ultimately Chooses a Strong US Dollar"