Summary: Since September, the dollar's trajectory of strengthening first and then weakening has been tied to market expectations and risk sentiment. This involves multiple factors, chiefly developments in the pandemic and the new fiscal stimulus package.
Futures Daily reported on October 13: Recently, the U.S. dollar index first rebounded strongly and then weakened again. The index rebounded from its 2020 low of 91.737 touched on September 1, rising to 94.745 by September 25—an increase of nearly 3.28% in less than a month. After September 25, however, the index weakened and slid again. After the National Day holiday, it fell back below 93.5, and in the past two trading sessions it has further tested 93, approaching the 92 range. Since September, the dollar's strength-then-weakness trajectory has been related to market expectations and risk sentiment, including several factors, mainly changes in the pandemic situation and the new fiscal stimulus package.
The mystery of the dollar's recent ups and downs: On one hand, the latest pandemic developments—especially the trend and concerns over a "second wave" in Europe—not only heightened market risk aversion but also pressured European currencies, fueling a dramatic rebound in the dollar. Markets that have fully experienced the impact of the pandemic responded quickly, flooding into the dollar as the preferred safe haven, thus boosting the dollar.
On the other hand, the outlook for a new U.S. fiscal stimulus package has been a focus, influencing expectations and risk sentiment, and therefore the dollar. As the multi-trillion-dollar emergency fiscal rescue measures rolled out earlier by the U.S. government gradually ran out, and with the pandemic and economy in the U.S. still far from a fundamental recovery, market demand for a new stimulus package has grown by the day. Yet the package, which should have been introduced smoothly, has been delayed by partisan disputes in Congress, and the situation has become even more complicated as the presidential election approaches. The "difficult birth" of the new stimulus package lowered expectations for the pace of U.S. economic recovery and raised market risk aversion. The impact of the unresolved stimulus package has been amplified by the recent resurgence of the pandemic. On October 6, President Trump suddenly called off negotiations on the stimulus package, triggering risk aversion and pushing the dollar index up by nearly 400 basis points. But he later reversed course and resumed negotiations; on October 9 he even said he hoped for a stimulus deal even larger than the Democrats' proposal. Risk sentiment was soothed, and the dollar quickly weakened again, recording a decline of more than 500 basis points on October 9.
Multiple factors support yuan appreciation: Since late May, the offshore yuan exchange rate against the U.S. dollar has climbed almost continuously, briefly breaking through the 6.7 mark after the National Day holiday. This has been driven by multiple factors, which can be grouped into three categories.
First, China has achieved major strategic results in fighting the pandemic, effectively brought the outbreak under control, and implemented timely, targeted, and forceful economic recovery and stimulus policies. This two-pronged approach has enabled China to be the first major economy to emerge from recession and embark on recovery, and it is likely to be the only major economy to achieve positive economic growth in 2020. This has made the yuan and yuan-denominated assets increasingly favored by the market in the post-pandemic era. This is the fundamental factor underpinning the yuan's strength, and the most critical one.
Second, in rolling out economic stimulus policies, China did not resort to unbridled money printing as the U.S. and Europe did—especially not the Federal Reserve—but instead adopted measured and extraordinary measures. When the pandemic's impact was severe, the central bank injected sufficient but not excessive liquidity to "replenish" the economy. Once conditions stabilized, it adjusted its policy focus, maintaining a prudent monetary policy stance within a normal monetary policy range. On October 10, central bank governor Yi Gang again stressed "maintaining a normal monetary policy for as long as possible." The prudence of China's monetary policy has curbed inflationary pressures domestically—with August CPI up 2.4% year on year—and externally, it has removed the monetary basis for a sharp yuan depreciation, further boosting market confidence in the yuan. This is another key factor behind the yuan's appreciation.
Third, the relative weakness of the dollar has also contributed to the yuan's strength. Since hitting a 2020 high of 102.99 in March, the dollar index has fallen sharply, at one point by more than 10 points. The ebb and flow within the world monetary system determines the relative strength of the Chinese and U.S. currencies, so a weak dollar naturally supports a strong yuan.
Precious metals have already recorded very strong gains this year. The main Shanghai gold futures contract briefly broke above 454 yuan/gram on August 7, while the main Shanghai silver futures contract touched a high of 6,877 yuan/kg on August 11. Both pulled back after hitting their yearly highs, but they remain at relatively high levels compared with the trading ranges before the rally began.
The dollar is a fundamental factor determining the rise and fall of precious metals. In terms of monetary attributes, taking gold as an example: after the collapse of the gold standard, gold lost its monetary status but still retained a considerable part of its monetary attributes and functions. In terms of safe-haven attributes, although both the dollar and precious metals can serve as safe havens, the market has long preferred the dollar or dollar assets as its first-choice safe haven. As a result, risk-off markets tend to favor the dollar, reinforcing the negative correlation between the dollar and gold. To illustrate with their performance: taking March 20—when the dollar index hit its yearly high—as the starting point and August 11 as the end point, the main Shanghai gold futures contract rose from a closing price of 343.16 yuan/gram to 436.94 yuan/gram, and the main Shanghai silver contract rose from 3,184 yuan/kg to 6,535 yuan/kg, while the dollar index fell from a closing level of 102.4 to 93.661. This clearly highlights the negative correlation between the dollar and precious metals.
In the current period and for some time to come, the dollar will continue to significantly influence precious metal trends. Although the dollar rebounded after breaking below 92 earlier, the pandemic situation and economic outlook in the U.S. remain unclear and lean pessimistic. The U.S. election is becoming ever more complex and unpredictable. Policy expectations that the Fed will keep interest rates near zero for a long time and allow U.S. inflation to temporarily exceed its target have been largely established. The minutes from the Fed's September policy meeting also point to the possibility of further easing measures. Against a backdrop of a dollar glut, the Fed shows no sign of tightening; instead, quantitative easing continues apace. As the basis for the dollar's creditworthiness, U.S. national credibility has been severely damaged. An increasingly strong yuan in the future is likely to gradually reverse the dominant side in the yuan-dollar exchange rate relationship and further weaken the dollar. All of this forms the basis for a long-term soft dollar and thus an important fundamental precondition for a long-term precious metals rally. The pullback after precious metals fell from their highs has lasted for some time, allowing a relatively good correction of the lack of a meaningful pullback, accumulated sentiment, and distortions from the earlier long bull market. It can be said that precious metals are now likely in the accumulation phase before the start of a new upward wave.
In the short term, the main Shanghai gold futures contract may fluctuate mainly in the 390–410 range; watch for a break above 420. In the medium to long term, it may test 440 or even 450 again. For the Shanghai silver 2012 contract, focus on resistance above 5,500 in the short term; in the medium to long term, the trading range for the Shanghai silver 2012 contract may remain at 5,150–5,830.