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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange Market Analysis]: The US dollar 100 mark has become an "iron top"? Weakness may spread to assets across the United States." Hope it will be helpful to you! The original content is as follows:
On Thursday, after closing down for three consecutive days, the US dollar index rebounded and once returned to above the 100 mark. As of now, the US dollar is quoted at 99.66.
The Trump tax reform bill was passed by a narrow advantage in the House of Representatives and was handed over to the Senate for deliberation. In addition, the U.S. Senate voted to end the bill to ban the sale of fuel vehicles in California and handed the bill to Trump for signature.
Federal Governor Waller: If tariffs drop, the Fed is expected to cut interest rates in the second half of 2025.
White House adviser Milan: There is no secret work on the negotiation of currency issues. Japan's Minister of Economic Regeneration: Visit the United States to negotiate tariffs from Friday to Sunday.
White House: Trump made it clear to Netanyahu that he hopes to reach an agreement with Iran.
Iran said that Iran vowed to make a "destructive response" to any Israeli foolish behavior. Any Israeli attack on the Iranian nuclear facility will be seen as a US intervention, capable but unintentional nuclear weapons.
2 Israeli Embassy staff in the United States were shot dead in Washington, and the suspect was arrested.
It is reported that OPEC+ is discussing another increase of 411,000 barrels per day in July.
US media: The US government is considering withdrawing about 4,500 soldiers from South Korea.
The Japanese Treasury yield curve has continued to steeper since April (as shown). Our interest rate strategy team believes this is mainly attributed to the structural oversupply of ultra-long-term Japanese government bonds.
From the demand level, life insurance companies are less willing to increase their holdings of ultra-long-term Japanese Treasury bonds than before, as they have basically completed adjustments to the duration mismatch between their assets and liabilities to meet the new solvency adequacy requirements that will take effect in April 2025. In addition, the Bank of Japan has gradually reduced its direct purchase of Japanese government bonds since July 2024. Furthermore, the recent intensification of market volatility after President Trump's "Liberation Day" remarks seem to have also suppressed investors' willingness to take long-term risks.
While at the supply level, the scale of ultra-long-term Japanese government bonds planned to be issued in fiscal year 2025 has not decreased significantly. This situation of oversupply seems to continue to drive the further steepening of the Japanese Treasury bond yield curve and has led to a decline in liquidity in the Japanese Treasury bond market in the recent past. Affected by this, the yield on 40-year Japanese government bonds once again hit a historical high. The upward pressure on ultra-long-term bond yields seems to be continuing after yesterday's 20-year Treasury auction results were weak.
In summary, the structural oversupply of ultra-long Japanese government bonds is posing upward pressure on yields.
In May, the euro zone comprehensive PMI fell from 50.4 to 49.5, indicating that the region's economy is stagnating again. Worryingly, the main drag on this situation is from the service industry, which has long been the main engine of eurozone growth.
The trade war is putting pressure on the eurozone economy, but so far its impact may have been transmitted primarily through uncertainty channels rather than direct trade effects. This is clearly seen in the PMI data in May: new overseas orders only saw a moderate decline, while manufacturing output actually grew again. The survey shows that the services sector, which has achieved steady growth during the manufacturing shrinkage in the past few years, is now continuing to decline, which is likely to be related to high uncertainty and further exacerbate concerns about economic growth.
In terms of manufacturing, new orders have stabilized after experiencing a long-term decline. The decline in finished product inventory is not as large as before. This may mean a disappointing sales performance, but it may also be an early sign that companies are reincreasing orders as inventory cycles are changing. Although the trade war obviously poses a downward risk to eurozone manufacturing activities, if the inventory cycle does turn, manufacturing activities also have certain upward potential.
However, for now, the eurozone economy seems to be heavy after a strong first quarterReturn to stagnant state. However, to be fair, the growth in the first quarter was also due to early shipments of some exports to the United States. Sluggish growth remains the main theme of economic activity in the eurozone, and there seems to be downside risks in the short term given that the trade war may intensify.
The Japanese Treasury bond (JGB) yield curve continues to steeper, mainly due to the imbalance in supply and demand relationships of ultra-long-term bonds (relatively loose supply). While this may prompt the Bank of Japan (BOJ) to slightly slow down its pace of quantitative tightening (QT) at its June meeting, we believe that the oversupply of ultra-long-term Japanese government bonds may continue unless interventions are taken at the government level.
In our opinion, the sharp market turmoil similar to that experienced during the British Tlas Cabinet, the possibility of happening in Japan is only tail risk. This is mainly due to Japan's favorable conditions in terms of fiscal policy stance, controlled inflation pressure, current account surplus, foreign investors holding small share of their treasury bonds, and considerable foreign exchange reserves. Even so, any discussion on the reduction of excise tax should be closely watched.
In our benchmark scenario forecast, as long as the Bank of Japan maintains its inherent tendency to raise interest rates—even if it may slow down the pace of quantitative tightening—the macro fundamentals may continue to be positive for the appreciation of the yen in the medium term.
There seems to be three major and eye-catching global macroeconomic changes that are being taken place, and these changes have been embedded in recent market developments and price behaviors to some extent.
First, market concerns about debt and deficit issues are increasingly prominent in the United States, but not limited to this, and emerged after Moody's recent downgrade of the U.S. credit rating. This can be seen from the relatively weak results of the 20-year U.S. Treasury bond auction yesterday, which caused the yield on the 30-year U.S. Treasury bonds to rise sharply by more than 12 basis points to 5.1%. It is also striking that Japan's 30-year Treasury bond yield soared by 40 basis points to 3.14% due to poor auction results, but it is not yet clear whether it is due to market fiscal concerns about the government or the imbalance in supply and demand of Japan's Treasury bonds under the background of the Bank of Japan's reduction in the scale of bond purchases.
Secondly, the United States may reach some kind of agreement with other countries (especially South Korea and Japan, etc.) on foreign exchange issues. As for South Korea, there are news reports that the United States believes that the fundamental reason for the trade deficit lies in the exchange rate issue, and the United States and South Korea are discussing the exchange rate direction during talks, but the United States has not mentioned the specific level. As soon as this news came out, the Korean won't exchange rate against the US dollar jumped to 1370.75, and then fell, and to a certain extent, affecting currencies such as the New Taiwan dollar and the Japanese yen.
Third, funds seek diversified allocations outside the US dollar. We're from yesterday's price behaviorIt was observed that the uncertainty of the US tax reform bill and the development trajectory of the US deficit jointly led to the sale of US stock markets and US Treasury bonds, but most importantly, it also led to the weakening of the US dollar and the strengthening of alternative safe-haven assets such as gold and Bitcoin. Of course, forex is largely a relative price asset, and the best indicators we have (although still incomplete) show that foreign funds flowing into places like Japan have increased, while retail investors in Asia have also been selling out slightly, which is in line with the broader theme of rebalancing funds from U.S. assets.
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Due to the author's limited ability and time constraints, some content in the article still needs to be discussed and studied in depth. Therefore, in the future, the author will conduct extended research and discussion on the following issues: