China's monetary tightening will have some impact on the USD and this can be seen on the credit impulse & US DXY chart.
The uptrend in US DXY means USD depreciation (inverse right axis) and vice versa. The chart is depicted in such a way to show the high correlation. The 2 lines may have a time lag of 6-12 months but they are still highly correlated to each other.
When China's credit impulse increases, the US DXY will increase too. However, China's monetary tightening will decrease its credit impulse and will also lead to a decrease in US DXY.
How true is this? We'll look at the USD index now.
As we can see, the USD index is reacting to China's monetary policy by trending higher recently. As the USD and the risk-free rate (10y) are highly correlated, we should see the US treasury yields trending up too.
The US treasury yield for 10-year has increased from 0.93% to 1.15% now.
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https://finance.yahoo.com/news/foreign-banks-china-forced-reduce-092214261.html
If China is adamant to continue its monetary tightening, the USD will appreciate according to its high correlation to the credit impulse data.
Some of my viewers are confused about the charts. Therefore, I will clarify this further.
The US DXY is recalibrated (inverse right axis) to show its high correlation to the credit impulse data. Therefore, the US DXY's uptrend is depicting a depreciation in USD. Conversely, the normal US DXY's uptrend will show an appreciation in the USD.
As we can see on the credit impulse chart, the credit impulse is turning south in early 2021 which means the USD is appreciating. The normal US DXY chart in early 2021 is also synchronizing an appreciation trend.
I hope this will clear all the doubts. Cheers!
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