International trade, politics and a roiling technology sector are putting the dollar’s recent softness into context.
International trade, politics and a roiling technology sector are putting the dollar’s recent softness into context. The greenback was lightly bid in the context of the Dollar Index by Europe’s mid-morning as it rose sharply against the Aussie and moderately vs. Nordic currencies and euro (after a new two-week high) and loonie. Sterling gains within its tight ‘Brexit deal range’. Upticks in the franc and yen give the game away. The slight greenback advantage is aligned with dwindling risk appetite as the dollar’s recent pattern of safety appeal comes to the fore. There are few creditable interpretations in terms of risk appetite or underlying currency support. The Dollar Index has yet to corroborate the false break thesis after slicing through and potentially invalidating rising trendline support that underpinned its advance since September. The gauge is perched on a horizontal support around 96.15 (established most obviously in August and earlier this month). Oscillators in the daily view suggest increased buying could resume in the near term. But after DXY fell at the second fastest rate of the month, last Friday, the chart also portrays a loss of confidence that is unlikely to return easily or be as pristine if it does.
Technical analysis chart: ICE U.S. Dollar Index – daily intervals - 20/11/2018 11:59:40
Source: Refinitiv/City Index
The preeminent trigger was the handful Federal Reserve policymakers breaking ranks to note signs of a global slowdown might be more salient than it earlier acknowledged. The comments appeared to crystalize pre-existing wariness that growth in key regions was already past peak. The market also attempts to factor possibly interconnected signs of weakening aggregate demand, in the wake of rising import duties, with the technology sector catching investors’ eye the most. In short, beyond safety demand, the dollar is beginning to look better integrated into the global considerations that have challenged appetite for riskier assets—mostly shares—outside of U.S. stock markets this year, causing most regions to underperform North American equity markets. If the cycle peak is indeed about to become more inclusive, we will have better indications of this in U.S. corporate and economic growth readings in early 2019. At some point, a weaker dollar should also be an interpreted as an easier dollar, alleviating funding conditions for weak current-account countries and credits. An early sign of this: U.S. 10-year Treasurys now yield roughly 3.05%, a 20 basis-point discount from 7½ peaks in October. Cheaper Treasury yields will also eventually aid sentiment on growth shares whose valuations became questionable amid hot market rates in recent months. This will not happen quickly though. For the remainder of the year, it looks like bears have arrived stateside to widen the more anxious sentiment that has prevailed more broadly for months.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.