- The US Dollar is recovering from Monday’s meltdown and advances against the Japanese Yen.
- Overnight, the RBA confirmed the Fed’s stance that a few data points are not enough to change the narrative.
- The US Dollar index flirts with a break above 103.00 and could turn this week’s performance into positive territory.
The US Dollar (USD) recovers firmly on Tuesday, with the Greenback sprinting higher against the Japanese Yen (JPY). The turnaround was already triggered in the US trading session on Monday when President of the Federal Reserve Bank of Chicago, Austan Goolsbee, tried to soothe markets by saying that a few easing data points are not enough to open the debate on a recession. Royal Bank of Australia (RBA) president Michelle Bullock joined that thesis and even added that another rate hike is not off the table, while the RBA decided to keep its interest rate unchanged during its August meeting earlier on the day.
On the economic front, the main point for this week is already out of the way. The Institute for Supply Management (ISM) data was released on Monday and helped spark the turnaround in the Dollar’s appeal as the ISM Service Purchasing Managers Index (PMI) expanded at a faster pace than expected. The main theme on Tuesday is the US Trade Balance data for June. Nothing really market moving expected from this.
Daily digest market movers: All gets quiet too quick
- Markets are recovering from Monday’s route, and equities move higher across the board. The Greenback is outpacing the Japanese Yen by over 1% in the European trading session.
- US Vice President Kamala Harris has been formally nominated as the Democratic candidate for the upcoming Presidential elections in November.
- At 12:30 GMT, the US Goods and Trade Balance data for June will be released:
- Goods and Services Trade Balance deficit came in smaller, from $75 billion to a smaller $73.1 billion.
- At 14:00 GMT, the TechnoMetrica Institute of Policy and Politics (TIPP) will release its monthly Economic Optimism Survey for August. The previous reading was at 44.2, with an increase to 45 forecasted for August.
- The US Treasury is heading to markets to sell 52-week bills and allocate 3-year notes at sharply lower rates than previously.
- Equity markets are jumping higher, with the Japanese Nikkei and Topix closing Tuesday with 10% gains each. Europe is trading solidly in positive territory. In theUS futures market, the Nasdaq leads the recovery, rising by nearly 2% in the day.
- The CME Fedwatch Tool shows a 73.5% chance of a 50 basis points (bps) interest rate cut by the Federal Reserve in September. Another 25 bps cut is expected in November by 54.5%, while a 29.7% chance for a 50 bps cut and 15.8% for no cut at all are being pencilled in for that meeting.
- The US 10-year benchmark rate trades at a new 52-week low at 3.82%, shooting higher as investors flee away from bonds and back into equities.
US Dollar Index Technical Analysis: First step, with many more to take
The US Dollar Index (DXY) is recovering, and it could turn into a very profitable week for the Greenback. Many investors and experienced traders will have used Monday’s route to do some bargain hunting and used the momentum to go against the tide as a recession in the US is clearly not in focus. With a very light US data calendar ahead, the risk for any underperforming data looks limited, which means that the DXY has room to rally back to July levels.
The three-tiered recovery is already in play, with the first up at 103.18, a level held on Friday though snapped on Monday in the Asian hours. Once the DXY closes above that level, next up is 104.00, which was the support from June. If the DXY can make its way back above that level, the 200-day Simple Moving Average (SMA) at 104.22 is the next resistance level to look out for.
On the downside, the oversold Relative Strength Index (RSI) indicator should prevent the DXY from making more hefty losses. Support nearby is the March 8 low at 102.35. Once through there, pressure will start to build on 102.00 as a big psychological figure before testing 101.90, which was a pivotal level in December 2023 and January 2024.
US Dollar Index: Daily Chart
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.