Crude Oil Product, US Treasury yields, and the dollar - the three most important variables in the Global macro market are exhibiting an unprecedented level of correlation not seen in the past 30 years.

In the past, the relationship between oil prices and the dollar was mostly negatively correlated, where rising oil prices typically accompanied a weakening dollar, because the USA is a net importer of oil, and rising oil prices worsened trade conditions.

However, on the 19th, Deutsche Bank Analyst Lachlan Dynan pointed out in a Research Report that since the USA became a net exporter of oil in 2018/2019, the correlation between the dollar and oil prices has changed drastically. The 10-year US Treasury yield has shown a long-term positive correlation with oil prices because changes in oil prices can affect inflation expectations, which in turn directly impact US Treasury yields.

Additionally, changes in external economic growth expectations may also simultaneously affect oil prices and US Treasury yields. The previously negative correlation between oil prices and the dollar had limited the possibility of synchronous fluctuations among the three; however, this limitation has now been broken.

USA's identity as a net exporter of oil: a structural turning point in the dollar cycle.

Deutsche Bank's research indicates that as USA's Energy exports increase, the impact of oil prices on USA's trade conditions has shifted from negative to positive. In other words, a rise in oil prices no longer signifies an "increase in costs" for the USA economy, but rather may lead to "increased revenues."

This change also means that the response mechanism of the dollar to oil prices has reversed: in the past, rising oil prices would often suppress the dollar, but now, rising oil prices are more likely to strengthen the dollar.

However, the short-term market impact of this structural change remains somewhat uncertain. For example, the recent proposal by the USA government to significantly increase domestic Oil & Gas production may lower oil prices by increasing supply, while also affecting market assessments of inflation expectations.

However, the research believes that the impact of this policy on USA Treasury bond yields still carries uncertainty.

The delicate relationship between yields and the dollar under policy backgrounds.

Deutsche Bank points out that USA Treasury Secretary Mnuchin and Trump have been attempting to influence USA Treasury bond yields through Energy policy, aiming to lower inflation expectations by reducing oil prices, thereby decreasing long-term interest rates.

However, since the USA is now a major Energy exporter, an increase in supply may bring additional economic growth momentum while lowering oil prices, making the final direction of 10-year USA Treasury bond yields harder to predict.

More importantly, the impact of falling oil prices may be just a one-time price shock, rather than leading to a sustained decrease in inflation. At the same time, once oil prices drop to a certain critical level, it may affect the profitability of the domestic Oil & Gas industry in the USA, contradicting the government's goal of encouraging Energy production.

In the Forex market, the direction of the dollar is influenced by various factors. If policies lead to an improvement in the USA's trade conditions (reducing imports or increasing exports), theoretically, the dollar would gain support. However, due to the complex effects of falling oil prices on trade conditions, the actual trend of the dollar will depend on the market's assessment of various competing forces.

Future outlook: The interaction patterns of the dollar, US Treasury yields, and oil prices.

Overall, Deutsche Bank's research believes that in the current market environment, the trends of oil prices, US Treasury yields, and the dollar are more synchronized than in the past. Therefore, any policy or market event that affects oil prices and US Treasury yields may have a greater impact on the dollar than before.

Currently, the downward pressure on the dollar mainly comes from USA's fiscal policy, declining economic growth expectations, and the market's re-pricing of the Federal Reserve's policy path. Deutsche Bank believes that the recent weakening of the dollar is not only related to market adjustments in expectations regarding the Federal Reserve's policies but also linked to falling oil prices.

In the future, if the USA continues to expand oil production, leading to long-term low oil prices and further dampening inflation expectations, US Treasury yields may remain low and exert some pressure on the dollar. However, if oil prices stabilize and rise, driving up inflation expectations, US Treasury yields and the dollar may experience a synchronized rebound.