November 29, 2022

Hardwood Paroxysm

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The US dollar, because it is no longer a safe asset

Since the beginning of the year, it has been The US dollar outperformed both the G10 and emerging market currencies, Reflecting the hard-line transformation of F.reserve food. Agoinflation The markets continued their rally, pricing the markets with a strong bullish cycle in favor of the verse card. The US dollar index It increased by about 10% and The US dollar has reached multi-year highs in almost all valuation measures.

Historically, the dollar tends to peak in conjunction with the Fed’s first annual rate hike, and there are many indications that it peaked after the first hike in March. First, inflation in the US has begun to slow, indicating that the Fed is unlikely to raise interest rates beyond current market expectations without an additional indication of inflation. In confirmation, Overnight Index Swaps (OIS) ruled out any possibility of a rate hike in 2023.

Second, long-term yields and expectations of equal inflation are beginning to decline, reflecting the fact that markets believe inflation is a secondary concern to growth expectations, about which concerns are growing.

Dollar overview

by extension, The path of a lower-than-expected rate hike should prevent a further and sustained appreciation of the dollar compared to current levels, Unless growth prospects deteriorate faster for the rest of the world than for the United States. Although the odds of a slowdown in growth Or even a real danger Recession increasing, we expect it Only in the unlikely event that a crisis such as the 2008-2009 crisis is repeated, can the dollar remain a safe asset.

As growth eases in the US, the currencies of countries with current account surpluses such as Lo The yen, the euro and the Swiss franc should rise against the dollar. The Euro will benefit from the expected rate hike from the European Central Bank after the peak of inflation. The European Central Bank is sensitive to the fact that currency weakness has amplified the effects of imported inflation on the Eurozone. The euro should also benefit from a return to lower interest rates on deposits, thanks to the repatriation of bond investors’ capital.

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The Japanese yen tends to rise during economic slowdowns, due to the fact that Japanese investors tend to return capital. It depreciated about 20% in the first two quarters of the year as the long-term relationship between USD/JPY and US 10-year bond yields took place. With domestic inflation continuing to decline, the real exchange rate of the Japanese yen has depreciated significantly. As markets rule out the possibility of a Fed rate hike in 2023, We think that the USD/JPY may rise again towards level of 125.

Future outlook for precious metals

In the world of precious metals, Gold’s short-term risks are trending slightly to the downside. As inflation begins to slow and more interest rate increases are expected, inflation-adjusted real interest rates may rise. This usually represents a negative development for gold.

but, Any downward movement must be limited, due to persistently high levels of geopolitical uncertainty. Our long-term fair value models for gold align with Prices are around $2000 an ounce. Therefore, there should be no significant price drop below $1800 in the coming months.