In March, due to a sharp escalation of tensions in the Middle East, international crude oil prices surged to $119 per barrel. Subsequently, as news emerged that former President Trump might signal a swift end to the U.S.-Iran conflict, market sentiment eased, and oil prices plummeted 28% in a single day, retreating to around $85 per barrel.
Recently, as the situation in Iran has again become complex and uncertain, oil prices have rebounded to some extent and remain at relatively high levels. The U.S. attack on Iran provoked strong retaliation from Iran. Furthermore, following the deaths of Iran's Supreme Leader and several senior military commanders in a U.S. "decapitation strike," various factions within Iran temporarily set aside differences, demonstrating unprecedented unity against an external threat.
Iran subsequently announced a blockade of the Strait of Hormuz. This strait is a strategic chokepoint for global oil transportation, controlling approximately 20% of the world's crude oil shipments. If the blockade takes effect, it would significantly impact international oil prices, equivalent to a sudden 20% reduction in global oil supply. Nations would be forced to draw on existing reserves, leading to a continuous daily depletion of petroleum stockpiles. Currently, oil price trends primarily depend on further developments in the Middle East situation.
Former President Trump faces considerable domestic pressure in the United States. With mid-term elections approaching, reports suggest he does not wish to become mired in prolonged conflict and has recently sought a face-saving way to de-escalate. However, no suitable path has been found yet, as a hasty withdrawal could be perceived as a loss of face. Consequently, Trump unilaterally declared "mission accomplished" and expressed a desire to avoid long-term entanglement. Such statements signal that this Middle East conflict is unlikely to persist indefinitely.
Therefore, the impact of this conflict on oil prices is not expected to be long-lasting. Nevertheless, the event has underscored for many countries the critical importance of strategic petroleum reserves. Even after the conflict ends and the Strait of Hormuz reopens, oil prices may not return to pre-conflict levels and could remain relatively high. Nations might further increase their oil reserves to hedge against similar sudden risks. As the lifeblood of industry, rising oil prices will transmit broadly across sectors, particularly affecting consumer goods prices, ultimately pushing global inflation higher.
As a result, the Federal Reserve may delay interest rate cuts, potentially postponing any reductions until after June. Currently, pricing in relevant U.S. futures market products implies a near-zero probability of rate cuts within the year, indicating that the conflict's impact on global inflation cannot be overlooked.
In May, Federal Reserve Chair Powell's term concludes. Expectations are that Trump will nominate Kevin Warsh as the new Chair. Warsh's past comments have been perceived as hawkish. His appointment raises market concerns that he might advance balance sheet reduction (quantitative tightening) while further delaying rate cuts. However, Trump, aiming to boost the stock market and his approval ratings, has consistently pressured the Fed for faster rate cuts, and Warsh is his nominee. Therefore, it is likely Warsh would pursue a dual policy: employing quantitative tightening to curb rapid price increases while implementing rate cuts to accommodate Trump's demands.
Consequently, one or two rate cuts are anticipated by year-end, potentially accompanied by simultaneous balance sheet reduction. This combined approach would exert some influence on global asset prices.
Following the recent conflict, international gold prices did not surge significantly as the adage "war spells gold's rise" might suggest; instead, they experienced some decline. This reflects market expectations that rising oil prices boosting inflation, coupled with a slower Fed easing cycle, are conversely unfavorable for gold. However, I have remained steadfastly bullish on gold's long-term trajectory over the past several years.
The fundamental logic for gold's long-term appreciation lies in the ongoing de-dollarization trend. Against the backdrop of persistent U.S. dollar issuance and multiple rounds of Fed quantitative easing—including unlimited measures—the dollar-denominated price of gold is inherently pushed higher. Simultaneously, numerous central banks are reducing their holdings of U.S. Treasury bonds and increasing their purchases of physical gold, significantly boosting actual gold demand.
Furthermore, U.S. government debt has reached $38.5 trillion, with annual interest payments exceeding $1.1 trillion, accounting for 20% of fiscal revenue. Questioning of U.S. debt credibility, combined with the de-dollarization trend, propels international gold prices on a long-term upward path. Thus, further price increases over time are expected.
Accordingly, I have consistently recommended allocating approximately 20% of an investment portfolio to gold-related assets to hedge against potential U.S. dollar depreciation. This strategy remains valid currently.
Annually, I release ten major predictions for the coming year. Over the past decade, these have been largely accurate for eight years, with deviations in two. The predictions issued last year for 2026 indicated the main trends would be: the Fed continuing its rate-cutting cycle, the U.S. dollar index declining further, U.S. stocks potentially facing a peak and subsequent pullback, the RMB exchange rate tending to appreciate, and international gold prices breaking through $5,000, with $10,000 being merely a matter of time. These judgments are already seeing initial confirmation. Upon review at year-end, the overall trends are expected to remain fundamentally unchanged.
Although the U.S. dollar index recently rebounded to near 99 due to short-term Middle East conflict effects, its long-term trend is still expected to gradually decline, primarily driven by de-dollarization and capital outflows linked to rising U.S. debt. The RMB has already shown significant appreciation this year. Last year's prediction of the RMB "breaking 7" was realized by year-end; this year's expectation is for a rebound to the 6.6-6.8 range, a view presented at last year's China Chief Economist Forum Annual Meeting. The current exchange rate is near 6.85.
An RMB appreciation trend is gradually establishing itself. However, excessively rapid appreciation could hurt exports. Therefore, the central bank has already reduced the foreign exchange deposit reserve ratio from 20% to zero to prevent overly fast appreciation, maintaining a moderate, controlled pace within a reasonable and balanced range. Recently, the dollar index's rebound has correspondingly slowed the RMB's appreciation pace.
Ultimately, long-term exchange rate trends depend on national economic growth, import-export trade strength, and monetary credibility. From these perspectives, I maintain a long-term bullish outlook for RMB appreciation, while the U.S. dollar index is expected to trend downward.
Recently released National Bureau of Statistics data on economic performance for January-February show CPI has experienced some rebound. This year's Government Work Report set a CPI target of around 2%, indicating a need to further expand domestic demand, stimulate consumption growth, and drive investment to foster a moderate CPI increase.
January-February CPI rose 0.8% year-on-year, compared to zero growth for the full previous year, indicating factors like the Lunar New Year and recovering consumption are driving price increases. Simultaneously, total retail sales of consumer goods for January-February grew 2.8% year-on-year, accelerating 1.9 percentage points from December last year, showing signs of consumption recovery. The current oil price increase may transmit to PPI. January-February PPI fell 1.2% year-on-year, but the rate of decline narrowed. If oil prices remain high, the PPI decline could narrow further in March-April, potentially turning positive.
Moderate price increases are beneficial for economic growth. China possesses relatively substantial petroleum reserves. While a short-term Strait of Hormuz blockade affects global supply, the impact on domestic industries is relatively limited. Furthermore, with Chinese commercial vessels and oil tankers reportedly granted special passage, the overall impact on economic growth is manageable.
Acting under more proactive and forceful macroeconomic policies and appropriately accommodative monetary policies, China's economy is expected to show significant improvement across multiple fronts this year.