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The Exchange Rate Is Uncertain: Where Will The Commodities Go?

2010/10/29 13:49:00 37

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Since 2008

financial crisis

Since the outbreak, governments have adopted low interest policies to stimulate economic recovery, which has provided ample liquidity and, on the other hand, bought the foreshadowing for inflation objectively.

It can be said that the massive intervention of financial capital has a significant and far-reaching impact on the pricing mechanism of commodities.

The dominance of the original pricing through supply and demand relationship has been weakened, and the role of exchange rate in trade has been increasing.

Even in a specific time and space, the exchange rate has changed.

Bulk commodities

Price trend.

Recently, the issue of RMB exchange rate has again become the focus of attention.

What is the driving force behind the RMB exchange rate issue? Where is the basis for us exchange rate policy making? Clarifying these issues will not only help us grasp the direction and intention of us exchange rate policy, but also have a very important significance in judging the trend of the future market of commodities.

Tracing back to the history of US dollar movements, it is easy to see that through weakness

US dollar policy

To get rid of high debt and achieve economic recovery is a common method in the history of the US government.

As early as the Great Depression of 1930s, the US government had led the US dollar to depreciate by 41% in order to alleviate the crisis by announcing the illegal possession of gold and nationalization of all gold.

Since the collapse of the Bretton Woods system, the US government has adopted measures to devalue the dollar and revalue other currencies in order to alleviate the domestic crisis.

The first huge dollar depreciation occurred in 1985 -1988 after the signing of the Plaza Accord.

In the early 1980s, the introduction of Reagan's economic policy led to the "twin" deficit of the current account deficit and fiscal deficit in the United States.

In 1984, the US current account deficit exceeded US $100 billion for the first time, reaching US $108 billion 400 million.

In order to improve the balance of payments, the United States, Japan, Britain, Germany and France signed the Plaza Accord in September 1985 to intervene in the foreign exchange market.

Since then, the US dollar has fallen sharply against the world's major currencies, especially the yen.

It was not until February 1987 that seven major industrialized nations reached agreement in the Louvre in Paris to take joint measures to stop the excessive decline of the US dollar.

At this time, the US dollar index has dropped from 144 in March 1985 to 88 in April 1988, and the US dollar has depreciated by 38.85% in three years and two months.

The second huge dollar depreciation occurred in 2002 -2008 after the US technology bubble burst.

In 2001, the US economy plunged into a recession under the double blow of the high tech bubble and the "9 11" terrorist attacks. The GDP growth rate dropped from 3.7% in 2000 to 0.8%.

In order to stimulate the US economy to recover as soon as possible, the Bush administration launched a tax cut scheme of up to 1 trillion and 320 billion US dollars when it came to power. The Federal Reserve also cut interest rates for 11 times in a year in 2001, reducing the federal funds rate from 6.5% to 1.75%.

Although this expansionary fiscal and monetary policy helps to promote the economic recovery of the United States, it also leads to an increase in the US fiscal deficit and a decline in the yield of treasury bonds, condoning and letting the US dollar depreciate.

In the next few years, the US government expanded fiscal spending and interest rates to stimulate the economy. By March 2008, the US dollar index fell to 70, the lowest since 1973, and it has fallen by 37.21% from the highest point in January 2002.

Two dollar devaluation

Looking back at the recent US dollar trend and the information released by the US Treasury, we seem to be able to clearly infer the intention of the United States by forcing the RMB and other East Asian countries / regions to appreciate their currencies through the weak dollar policy (as shown below), thereby achieving the goal of balancing their economic development patterns, reducing imports, expanding exports and reducing debt.

Therefore, the US dollar will remain relatively low for a long time.

On the other hand, history shows that the US government believes that the bottom line of the US dollar depreciation may be around 40%.

At present, the US dollar's extreme short selling momentum has slowed down, and the possibility that the US will continue to let the US dollar index fall below the 70.68 lows is unlikely.

It is speculated that if the United States continues to promote quantitative easing after the conference, it will undoubtedly boost another round of commodity prices.

At the same time, it will be possible to make the dollar a financing currency, a large number of high interest countries like China to carry out arbitrage, thus bringing new capital bubbles and even inflation, which is well worth our vigilance.

If the conference reached a consensus on exchange rate issues, the United States should give up or slow down liquidity in order to ensure the relative stability of the exchange rate under the premise of ensuring economic growth.

Then, the US dollar index will probably form a small rebound after the extreme decline, thus bringing a high level of volatility of commodities.

Let us wait for the final outcome of the 20 country finance ministers' meeting.