【Guangfa Strategy】"Warsh's Expectations" and the Decline of the Dollar: The Switch and Reconstruction of Global Stock Market Pricing Anchors
The confirmation of Kevin Warsh as the new Federal Reserve Chairman, who during his time as an economist advocated for "simultaneous rate cuts and balance sheet reduction," is expected to support a stronger dollar in the short term and steepen the U.S. Treasury yield curve, putting certain pressure on precious metal prices. In the medium to long term, the structural issues of U.S. debt have not been resolved; Warsh's policies may more likely slow the pace of the dollar's decline rather than fundamentally reverse its trend. As he takes office as the Federal Reserve Chairman selected by Trump, it will be challenging to implement overly hawkish policies, and the market's short-term reactions may be overly intense, while the long-term impacts are manageable.
The impact of exchange rates on equity assets is mainly transmitted along three channels: (1) Corporate cost and profit elasticity: currency appreciation reduces the cost of imports priced in foreign currencies, improves the exchange gains and financial expenses of companies with dollar-denominated debts, directly lifting the profit margins and ROE of related industries; at the same time, it creates certain pressure on export-oriented companies regarding exchange settlements and competitiveness. (2) Capital flow and asset price ratio: the expectation of appreciation enhances the risk-return ratio of foreign capital allocating local currency assets and hedges exchange rate risks, often leading to net inflows of cross-border capital such as northbound funds. (3) Macro expectations and risk appetite: a strong currency is often seen as a comprehensive signal of fundamental improvement and a friendly external environment (overseas liquidity easing).
Cross-market reviews show significant structural differences in the stock-exchange relationship: (1) The U.S. shows a phase of negative correlation, which includes the valuation uplift of risk assets triggered by marginal liquidity easing and benefits from the high overseas income share of U.S. multinational companies leading to exchange rate conversion gains; (2) Japan forms a more typical chain of "devaluation—foreign capital inflow—trading volume expansion—valuation uplift," where yen depreciation improves exports and EPS while reducing foreign capital purchase costs and reinforcing the expansion of carry trades; (3) The stock-exchange linkage in the Eurozone is relatively weak; although euro depreciation benefits the export sector, the internal cyclical divergence and political risk premium often dilute the overall explanatory power; (4) Emerging markets like Brazil demonstrate "high volatility and high linkage."
Currently, the global dollar cycle is in a peak decline phase, the RMB has gone through a depreciation clearance and entered a mild appreciation channel, coupled with foreign capital inflows and a shift from valuation repair to profit-driven dynamics, Chinese equity assets are in a relatively favorable repricing window. In terms of allocation, it is recommended to embed exchange rate logic into asset allocation: in A-shares, focus on "core manufacturing assets + appreciation benefit chain" as dual pillars, paying close attention to import cost-sensitive sectors (upstream resource products and some midstream manufacturing), companies with a high proportion of foreign currency debts, cross-border consumption, high-end domestic demand, and sectors preferred by foreign capital with high liquidity and quality; Hong Kong stocks should focus on capturing the resonance opportunities of southbound fund inflows + valuation discounts + improved exchange rate environments, prioritizing positions in technology leaders, internet platforms, energy resources, and financial leaders that possess both dividend capabilities and growth attributes.
Risk Warning: It is necessary to dynamically monitor multiple risks under the global macro environment, including the tail risk of a "triple kill" involving stocks, bonds, and currencies. If global inflation recurs or major economies' monetary policies change drastically, it may trigger a linked decline in asset prices; the risk premium raised by geopolitical conflicts will continue to disturb exchange rate stability, thereby impacting cross-border capital flow patterns; the policy path of the Federal Reserve carries uncertainty; if the new chairman's "hawkish" stance exceeds expectations, it may strengthen the dollar, thereby suppressing non-dollar assets.
The confirmation of Kevin Warsh as the new Federal Reserve Chairman, who during his time as an economist advocated for "simultaneous rate cuts and balance sheet reduction," is expected to support a stronger dollar in the short term and steepen the U.S. Treasury yield curve, putting certain pressure on precious metal prices. In the medium to long term, the structural issues of U.S. debt have not been resolved; Warsh's policies may more likely slow the pace of the dollar's decline rather than fundamentally reverse its trend. As he takes office as the Federal Reserve Chairman selected by Trump, it will be challenging to implement overly hawkish policies, and the market's short-term reactions may be overly intense, while the long-term impacts are manageable.
The impact of exchange rates on equity assets is mainly transmitted along three channels: (1) Corporate cost and profit elasticity: currency appreciation reduces the cost of imports priced in foreign currencies, improves the exchange gains and financial expenses of companies with dollar-denominated debts, directly lifting the profit margins and ROE of related industries; at the same time, it creates certain pressure on export-oriented companies regarding exchange settlements and competitiveness. (2) Capital flow and asset price ratio: the expectation of appreciation enhances the risk-return ratio of foreign capital allocating local currency assets and hedges exchange rate risks, often leading to net inflows of cross-border capital such as northbound funds. (3) Macro expectations and risk appetite: a strong currency is often seen as a comprehensive signal of fundamental improvement and a friendly external environment (overseas liquidity easing).
Cross-market reviews show significant structural differences in the stock-exchange relationship: (1) The U.S. shows a phase of negative correlation, which includes the valuation uplift of risk assets triggered by marginal liquidity easing and benefits from the high overseas income share of U.S. multinational companies leading to exchange rate conversion gains; (2) Japan forms a more typical chain of "devaluation—foreign capital inflow—trading volume expansion—valuation uplift," where yen depreciation improves exports and EPS while reducing foreign capital purchase costs and reinforcing the expansion of carry trades; (3) The stock-exchange linkage in the Eurozone is relatively weak; although euro depreciation benefits the export sector, the internal cyclical divergence and political risk premium often dilute the overall explanatory power; (4) Emerging markets like Brazil demonstrate "high volatility and high linkage."
Currently, the global dollar cycle is in a peak decline phase, the RMB has gone through a depreciation clearance and entered a mild appreciation channel, coupled with foreign capital inflows and a shift from valuation repair to profit-driven dynamics, Chinese equity assets are in a relatively favorable repricing window. In terms of allocation, it is recommended to embed exchange rate logic into asset allocation: in A-shares, focus on "core manufacturing assets + appreciation benefit chain" as dual pillars, paying close attention to import cost-sensitive sectors (upstream resource products and some midstream manufacturing), companies with a high proportion of foreign currency debts, cross-border consumption, high-end domestic demand, and sectors preferred by foreign capital with high liquidity and quality; Hong Kong stocks should focus on capturing the resonance opportunities of southbound fund inflows + valuation discounts + improved exchange rate environments, prioritizing positions in technology leaders, internet platforms, energy resources, and financial leaders that possess both dividend capabilities and growth attributes.
Risk Warning: It is necessary to dynamically monitor multiple risks under the global macro environment, including the tail risk of a "triple kill" involving stocks, bonds, and currencies. If global inflation recurs or major economies' monetary policies change drastically, it may trigger a linked decline in asset prices; the risk premium raised by geopolitical conflicts will continue to disturb exchange rate stability, thereby impacting cross-border capital flow patterns; the policy path of the Federal Reserve carries uncertainty; if the new chairman's "hawkish" stance exceeds expectations, it may strengthen the dollar, thereby suppressing non-dollar assets.