Using the futures of the offshore RMB exchange rate against the US dollar to hedge the depreciation risk of the US dollar

SMM News: since July, the dollar exchange rate has shown a momentum of accelerated depreciation, thus stimulating precious metals, copper and other dollar-denominated commodities to rise strongly. For the exchange rate of the US dollar against the offshore RMB, the continued depreciation of the US dollar has pushed up the passive appreciation of the RMB. The main core factors of the depreciation of the US dollar include the continued loose monetary policy, fiscal and trade double deficit, and the second outbreak of the epidemic in the United States, the widening of the interest rate gap between China and the United States and the weakening of the credit of the US dollar have added to the depreciation of the US dollar.

The rebound of the epidemic in the United States slows the economic recovery.

The first reason for the sharp depreciation of the dollar is the slowing recovery of the US economy. As a result of the second outbreak in the United States, some states suspended or cancelled economic restart measures, resulting in a sharp decline in market confidence in the dollar. As of July 27, there were 61571 new confirmed cases in the United States, of which 595 were new deaths and 46474 were cured, with the number of new confirmed cases exceeding the total of 47069 new deaths and cured cases. this means that many states in the United States are very short of medical resources.

Recent data show that the economic rebound is stalling as a result. On the one hand, American incomes began to fall and did not continue to rise as a result of government subsidies. Personal income excluding transfer income, a measure of the National Bureau of Economic Research ((NBER)), bottomed out in April, rose in May, but fell sharply in June. On the other hand, the US labor market began to weaken, with 1.416 million people applying for unemployment benefits for the first time in the week of July 18, higher than the expected figure of 1.3 million, and for the 18th consecutive week, more than one million people applied for unemployment benefits for the first time.

It is worth noting that as the epidemic persists for a long time, even with the introduction of relief measures in the United States, the number of corporate bankruptcies in the United States is still on the rise. In the first three weeks of July, the number of US corporate defaults was 256. The rise in the number of corporate bankruptcies constrains corporate capital spending, employment and the slope of economic recovery.

Judging from the Huaqi economic accident index, the US Huaqi economic accident index has turned downward since July 17, which means that with the second outbreak of the epidemic, the momentum of US economic recovery is slowing. The index of economic accidents in the United States fell to 238.5 points as of July 27, according to the data.

The twin fiscal and trade deficits of the United States are another important reason for the weakening of the dollar. As the world's largest economy, the federal government of the United States has a public debt that exceeds its total GDP in a year. Coupled with the fact that it is already unable to make ends meet, the United States is under considerable debt pressure.

But even so, the United States still has no plans to issue less debt. After issuing 3 trillion dollars of new treasury bonds in the second quarter of this year, the latest round of economic stimulus bill will be passed in the near future, and some institutions expect that by the end of this year, the total debt borne by the US government will reach 30 trillion US dollars.

The Federal Reserve has no bottom line to "release water" and "borrow" to weaken the dollar.

The Fed continues to release liquidity, with the dollar index falling for a total of 11 rounds since 1971. The most recent annual decline in the dollar index was from December 20, 2016 to February 16, 2018, when the dollar index fell by 14.2% for a period of one year and one month.

Judging from these 11 dollar decline cycles, with the exception of the stagflation period in the 1970s, January-April 1994 and December 2016-February 2018, almost all of the other dollar decline cycles are in the Fed interest rate reduction cycle. and the depreciation of the dollar mostly occurs at the peak of prosperity or the economic cycle that is about to turn downward.

Judging from the Fed's balance sheet, dollar liquidity is still expanding. The Fed's total assets rose $6.141 billion month-on-month to $7.01 trillion in the week of July 22, with medium-and long-term Treasurys and MBS still the main subjects of expansion, but at a slower pace than last week. In addition, the Fed's PDCF tool expanded slightly again this week. Judging from liquidity indicators, the trend of all data this week is stable, the US financial condition index continues to improve, and although the situation of leveraged loans is still tight, it shows a trend of gradual improvement.

The widening interest rate gap between China and the United States is the direct cause of the depreciation of the US dollar against the RMB. Judging from historical data, the widening interest rate gap between China and the United States often means that China's monetary environment is tighter than that of the United States, or that China's economic growth momentum is better than that of the United States. Since June, the intention of the people's Bank of China in cracking down on idling of funds, regulatory arbitrage and illegal inflows of funds into the property market and stock market is very obvious, while the Federal Reserve is still releasing flows despite the second outbreak of the epidemic in the United States and the suspension of economic restart. Recently, a new $1 trillion stimulus package is still under discussion, and the "water release" in the United States has not stopped.

As of July 27, the spread on Chinese and US 10-year Treasuries was 2.2561 percentage points, up from just 1.8 percentage points before the Fed launched unlimited QE on March 23. Statistics show that the US dollar against offshore RMB has a negative correlation with the spread of Sino-US 10-year treasury bonds. As the Sino-US spread widens, the US dollar will depreciate against the offshore RMB exchange rate.

It is expected that the continued decline of the US dollar is at risk of anti-withdrawal.

Looking ahead, Fed policy is likely to be cautious because of the need to sort out the monetary policy framework and forward guidance. However, given that the US economic recovery is slowing, it does not rule out the Fed's measures to control the yield curve, so loose liquidity in the US dollar is likely to continue to lead to a depreciation of the dollar. It is worth noting that the dollar may rebound in the short term due to the rebound of the epidemic in Europe and the election in the United States, and be wary of the risk of a pullback after a sharp depreciation of the dollar against the RMB.

Strategically, it is recommended to continue to short the exchange rate futures of the US dollar against the offshore RMB in order to hedge against the depreciation risk of the US dollar. Given that some funds pursue commodities with hedging attributes such as gold, silver and even copper, it is necessary to pay attention to the pace of short-term shorting the dollar.

However, from the perspective of the global monetary system, dollar credit has been weakened by the Fed's bottomless "release" and "borrowing". In the medium term, the depreciation of the dollar has not yet ended.

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