MARKETS IN TURMOIL: The Dollar’s Drop in Context

Combined with this weekend’s dour headlines around the spread of coronavirus, the massive move in oil has thrown global markets into sheer panic...


“There are decades where nothing happens, and there are weeks where decades happen.”

- Vladimir Lenin

Poetically, today’s market volatility (a proverbial day where a decade is happening) is heavily a result of actions from Russia, Lenin’s motherland. After Russia rejected an oil production cut plan from OPEC late last week, Saudi Arabia launched a full-on “price war,” cutting prices for a barrel of oil by $6-$8 over the weekend. With production ramping up at the exact moment that demand is drying up due to coronavirus fears, the oil market has gone into a tailspin, collapsing by over 20% so far today to trade down nearly 50% on the year to date.

Combined with this weekend’s dour headlines around the spread of coronavirus, the massive move in oil has thrown global markets into sheer panic:

  • Major European indices are trading down 5-7%, with US index futures flirting with limit down at -5%.
  • Global bond yields are collapsing in a huge “flight to safety” bid. The entire US Treasury curve is now trading below 1%.
  • Oil is seeing its biggest one-day drop since the start of the Gulf War in 1991
  • Even crytoassets are in freefall, with market benchmark Bitcoin shedding $1200 over the weekend.
  • Outside of bonds, gold is the only major asset bucking the selling trend by gaining roughly 0.5% as of writing.

While those moves are certainly headline-grabbing, the normally stoic FX market has seen its fair share of volatility as well. As of writing, the most dramatic moves are in the “safe haven” Japanese yen, which is tacking on roughly 3% against the US dollar and in the oil-correlated Canadian dollar, which is falling by more than 1.5% against the greenback. As the chart below shows, almost every major currency pair has eclipsed its average daily move already, and those dramatic moves could easily extend heading into North American trade:

Source: Refinitiv, GAIN Capital

For the rest of the day, global markets will take their cue from Wall Street. There’s no doubt it will be an ugly day for investors regardless, but if US traders are able to stem the bleeding or even prompt an intraday rally, bargain hunters could step in and prompt a bounce in risk appetite. On the other hand, if US traders extend the panic from the Asian and European session, we could see a true collapse in global markets as investors acknowledge that the situation will likely get worse before it gets better.

Regardless, the US dollar index has definitively broken the key support level we highlighted on Friday. As of writing, the index is trading down nearly 1%, the biggest one-day drop since August and the second-largest drop since early 2018. With some analysts estimating that coronavirus cases in the US will (at least) double this week, the fundamentals of the economy and markets are likely to get worse before they get better. Technically speaking, the US dollar index is probing minor support from October 2018 and January 2019 near 95.00, but a definitive break below this floor could expose the lows from Q3 2018 near 93.75 next.

Source: TradingView, GAIN Capital

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

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.

For further details see our full non-independent research disclaimer and quarterly summary.