Trade Of The Week: Big Week For Dollar As NFP Looms

G10 currencies were practically pulverized by the greenback’s dominance with the pound shedding roughly 17% and yen over 20%.

After hitting a fresh 20-year high above 114.50 last week, the Dollar Index (DXY) tumbled thanks to a sharp recovery in the euro & pound. Given how the euro makes over 55% and the pound more than 10% of the DXY weighting, any further recovery in both currencies may influence the index’s direction in the short term.

We also saw some action on the equally-weighted dollar index which failed to secure a weekly close above 1.2800.

Despite the weakness witnessed last week, dollar bulls remain in the driving seat with the fundamentals keeping the engines healthy and running smoothly. However, a fresh catalyst could be needed for bulls to switch into higher gear in the weak ahead…and this could be the highly anticipated US jobs report on Friday.

Taking a quick look at the technical picture, prices remain bullish on the weekly charts as there have been consistently higher highs and higher lows. The DXY could make a new higher low before pushing higher or simply push back above 114.50 to test 114.73 and beyond.

The Low Down…

King dollar continues to feast on aggressive rate hike bets and global recession fears.

Last week, a chorus of Fed speakers struck an almost universally hawkish note on rate hikes. We saw the 10-year Treasury move above 4% for the first time since 2008, fuelled by expectations for the Fed to launch more monetary bazookas. As concerns intensified over the hawkish policies by global central banks sparking a recession, investors turned to the dollar as a shelter of safety.

As the first month of Q4 gets underway, dollar bulls have kicked off on a shaky start. Although it has weakened against most currencies, it is still early days. Traders are predicting a 66% probability of a 75-basis point rate hike in November. If this becomes reality, that would mark the fourth consecutive jumbo-sized 75 bp rate hike in 2022 against the inflation menace. Such a move could inject dollar bulls with renewed inspiration but investors may be more concerned with what happens beyond November and the New year.

Ahead of the Fed’s next policy meeting next month, key US economic data and speeches from Fed officials may influence expectations over how aggressive rates are hiked. Given how the dollar remains highly sensitive to speculation around hikes, this could translate to volatility over the next few weeks.

The Week Ahead…

It’s all about the US jobs report on Friday.

The consensus expects the US economy to have created 250k jobs in September which comes after a fifth straight beat in August. The unemployment rate is projected to remain at 3.7% while wage growth is seen hitting 0.3%. If the pending jobs data meets or exceeds market expectations, this may reinforce bets over the Fed moving ahead with a 75 basis point rate hike in November. Alternatively, a soft jobs report may reduce the odds of another jumbo- rate hike – weakening the dollar while supporting equity markets.

It may be wise to keep a close eye on the numerous speeches from Fed officials throughout the week. If Fed speakers remain hawkish and signal more aggressive hikes, this could keep dollar bulls hydrated ahead of the US jobs report. On the other hand, any hint of doves may see dollar bears enter the scene.

Dollar Set to Rebound?

After failing to secure a weekly close above 1.2800, the equally-weighted dollar index has edged slightly lower. Nevertheless, the fundamentals remain in favour of bulls and this could limit downside losses.

Bulls need to push back above 1.2800, to open a path back towards 1.2880 and higher. Sustained weakness below 1.2800 may open the doors towards 1.2500 and 1.2184.

Should 1.2500 prove to be reliable support, a rebound back towards 1.2800 could be a possibility.

For more information visit FXTM.

Gold Starting Stage 4 Decline and What It Means for Investors

Passive Buy and Hold Investors in General are Starting to Panic: XLU, Dividends, Bonds

It has been an interesting year with stocks down nearly 25% and the bond ETF TLT down over 40% since the 2020 highs. The passive buy and hold investor is becoming panicked and we can see this in the stock market through the mass selling of utility stocks dividend stocks and bonds.

When the masses become fearful they liquidate nearly all assets in their portfolios which is why we see the Big Blue chip stocks selling off along with precious metals. As investors liquidate around the world they focus on where their money can be preserved. With most currency falling in value there is a flood towards the U.S. dollar index as the safety play.

Gold Video Analysis

Here you can watch my detailed analysis along with both my short-term expectations and long-term supercycle outlook.

Global Currency Trends – Monthly Charts

As the US dollar index rises we tend to see precious metals fall. As you can see from the charts below almost all currencies are falling in value helping to send the US dollar index sharply higher this is a headwind for precious metals until it finds resistance in tops.

Gold Monthly Chart Comparing 2008 Bear Market and 2022

Let’s take a look at the monthly chart of gold. I believe gold entered a new bullish supercycle in 2019, which is very similar to the Super cycle that started in 2001.

I believe the bear market in equities we have started can be compared to the 2008 bear market. Technical analysis shows that gold could correct another 16% lower and match the same 34% correction we saw in 2008.

The price of gold is threatening the 1674 support level. If price is broken on the monthly chart it will signal a large sell off to roughly the $1300 to $1400 level for gold.

While the circumstances and economy are very different from 2008 the price charts are painting a very similar picture. I believe there’s still a long way to go for gold to find support and it may take another 8 to 12 months to unfold. I also believe that the precious metal sector will be one of the first assets to bottom and then start a multiyear rally very similar to what happened during the 2009 to 2011 rally.

While the 34% correction starting to take place may look very large it is in line with what we’ve seen in the past. While price charts don’t repeat they do tend to rhyme so I’m expecting a similar type of scenario though I’m sure it will unfold a little differently and take a different length of time to mature.

Price Stage Analysis – Gold Starting Stage 4 Decline

The price of gold is on the verge of breaking down from a stage three topping phase. Once the breakdown is confirmed it will then be in a stage 4 decline which is known as a bear market. It’s important to note that we can have bear markets within supercycles.

Just like when gold started at new super cycle in 2001 which lasted to 2013 there can be large corrections and smaller bear markets within the bullish Super cycle.

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Dollar Index Rockets Higher and Has More Room to Run

The US dollar Index has been one of the hottest assets to own this year. I believe the rising value of the dollar index has been putting downward pressure on the metals sector all year. As you can see from the quarterly chart below, The US dollar index still has more room to run to match the high set in 2001.

Keep in mind I still think there’s another three to five more bars before the dollar forms a top and reverses direction. Each bar on the chart is 3 months because this is the quarterly chart so we still have potentially a year of sideways or lower gold pricing ahead of us.

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Gold Miners Will Be Under Pressure If Gold Falls

If gold breaks down and the bear market in equities continues, we will see gold mining stocks continue to sell off. The large cap gold stocks ETF GDX shows a potential of 44% decline in price over the next year. While this may sound bad it will become an extraordinary opportunity in do time.

I believe silver and silver mining stocks will follow that of gold stocks as well.

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Concluding Thoughts

In short, I’m very excited for what is unfolding in the precious metals sector. And while it may still be early I’m keeping my eye on the sector for the start of a new super cycle rally in 2023 which could be life changing for investors.

TheTechnicalTraders created the Consistent Growth Strategy that can be manually followed or autotraded in a self-directed retirement account for people who do not want to spend their valuable time in front of a computer. Save time to do what you love and lower stress to enjoy every moment of today.

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www.TheTechnicalTraders.com

Disclaimer: This article and any information contained herein should not be considered investment advice. Technical Traders Ltd. and its staff are not registered investment advisors. Under no circumstances should any content from websites, articles, videos, seminars, books or emails from Technical Traders Ltd. or its affiliates be used or interpreted as a recommendation to buy or sell any security or commodity contract. Our advice is not tailored to the needs of any subscriber so talk with your investment advisor before making trading decisions. Invest at your own risk. I may or may not have positions in any security mentioned at any time and maybe buy sell or hold said security at any time.

Mid-Week Technical Outlook: Dollar Dominates FX Space

Major currencies have been crushed by the dollar’s meteoric rise this month with the British Pound and New Zealand dollar shedding over 8%. Given how the dollar continues to draw strength from aggressive rate hike bets, geopolitical tensions, and positive US economic data – more upside could be on the cards.

With more Fed officials scheduled to speak this week, this may translate to more volatility on the dollar. Where there is volatility, there are potential opportunities.

Our focus today will be mainly on USD crosses with the tool of choice none other than technical analysis.

DXY Bulls Unstoppable?

The dollar’s appreciation over the past few days has been phenomenal. Bulls remain supported by key fundamental forces with the technicals signalling further upside. Prices are trading around 114.70 as of writing with the next key point of interest at 115.00. A strong breakout above this level may open the doors towards 115.34 and 118.75. Should 115.00 prove to be strong resistance, a decline back towards 113.30 and 111.60.

EUR/USD Eyes 0.9500

An appreciating dollar has dragged the EURUSD well below parity. Prices are heavily bearish on the daily timeframe with the candlesticks respecting a bearish channel. A strong breakdown below 0.9500 could open a path towards 0.9300. If 0.9500 proves to be tough support to crack, a rebound back towards 0.9900 and parity could become reality.

GBP/USD Preparing to Resume Selloff

It’s been a rough week for the GBPUSD. After hitting an all-time low on Monday, we saw the currency stage a sharp rebound. Nevertheless, prices remain heavily bearish with a break back below 1.0600 suggesting a decline towards 1.0520 and 1.0350, respectively. Should prices rebound back towards 1.0850, the currency pair could test 1.1000 and 1.1350.

AUD/USD Bears Eye 0.6200

Aussie bears remain in the driving seat as the currency pair descends lower with each passing day. There have been consistently lower lows and lower highs while the MACD trades to the downside. A strong breakdown below 0.6350 could encourage a decline towards 0.6270 and 0.6200.

USD/JPY Breakout on the Horizon

It’s all about the 145.00 level on the USDJPY. A stronger dollar could encourage bulls to conquer this resistance, opening the doors towards 147.00 and higher. Given how this level has stood the test of time. A rejection from this point could result in the USDJPY trading back within its current range.

NZD/USD Rebound in the Process?

After dropping over 500 pips this month, could the NZDUSD be preparing for a rebound? There have been consistently lower lows and lower highs while the MACD trades to the downside. Prices recently staged a strong rebound from the 0.5560 level with bulls eyeing 0.5720 and 0.5800, respectively, below 0.55600 – prices may sink towards 0.5500.

For more information visit FXTM.

Why FX Markets React to Central Banks?

Here’s a quick catch up:

  • US Federal Reserve: hiked by 75 basis points
  • Bank of Japan: left benchmark rate unchanged
  • Swiss National Bank: hiked by 75 basis points
  • Central Bank of Norway: hiked by 50 basis points
  • Bank of England: hiked by 50 basis points

READ MORE: (Sept 19 article) Trade of the Week: GBPUSD to sink further?

For an example as to how much a central bank can influence FX markets, consider how the equally-weighted USD Index (which measures the dollar’s moves against six other G10 currencies) has punched its way to a fresh two-year high, trading at levels not seen since the onset of the pandemic.

Such a spike in the US dollar came after the US central bank, also the world’s most influential central bank, informed markets that it has to push US interest rates higher than expected in order to combat stubbornly-high inflation.

With so much action going on across FX markets, here’s a timely reminder of the basics surrounding how central banks impact FX markets.

First, let’s begin with …

What Is A Central Bank?

A central bank is an institution that manages a country’s currency and money supply.

It also helps the economy achieve certain goals, such as keeping unemployment stable and low while ensuring price stability (keeping inflation under control).

What’s The Main Problem For Central Banks Right Now?

Currently, the number one problem facing most central banks around the world: red-hot inflation!

That is to say, the central bank’s is trying hard to make sure that the prices that consumers are paying don’t rise too much too fast.

Of course, the central bank wants to protect the public and make sure consumers can continue spending money to help grow the economy.

Otherwise:

  • When things get too expensive, consumers may not be able to afford as much goods and services, which may lead to lowered spending.
  • When overall spending sees a big drop in an economy, that would negatively affect the income that businesses and producers can get.
  • Less income for companies may translate into cost-cutting measures (e.g. job cuts) in order for the business to try and survive.

In short, inflation that’s out-of-control is bad news for the economy.

How Are Central Banks Trying to Control Inflation?

The main way that most central banks try and subdued red-hot inflation is by raising interest rates.

Here’s how it works:

Higher interest rates = lower demand / lower money supply = slower inflation

However, there’s a dark side to interest rate hikes as well.

If a central bank raises its benchmark rate(s) too high, too fast, that may destroy demand levels (drastically lowered spending) in an economy to the point that there’s a recession!

Hence it’s a tricky balancing act that central banks face right now.

They have to raise interest rates high enough to subdue inflation, but not do it too much so as to incur too much pain for the economy (e.g. too many jobs lost).

So How Does All this Impact Currency Markets?

Here are three key ways:

  1. Economic performance

Markets reward the currency of the economy that can better withstand these higher interest rates.

For example, the US dollar has surged to its highest levels against the British Pound since 1985, even though both the US Federal Reserve and the Bank of England have been raising interest rates.

Because markets believe that the US economy is better withstanding this ongoing rate hikes, better than the UK economy that’s facing its worst cost-of-living crisis in a generation, there has been more demand for the US dollar relative to the British Pound.

Hence, no surprise that GBPUSD has now reached its lowest levels since 1985.

  1. Yields

When a central bank raises its interest rates, investors also sell off its government bonds.

When the prices of these bonds fall, their yields rise.

NOTE: Yields are a measure of how much an investor can earn from a particular asset.

Hence, the country whose bonds offer a higher yield then attracts more investors, who then demand more of that country’s currency in order to purchase its assets.

In fewer words, generally speaking, higher yields = stronger currency.

This is especially evident in USDJPY which has soared to its highest levels since 1998 earlier, almost touching the 146.0 mark before pulling back today.

When you consider the following yields on offer:

  • US 10-year Treasuries: 3.53%
  • Japanese 10-year government bonds: 0.228%

Given this massive gap between US and Japanese yields, no surprise that investors have been flocking to the US dollar and less so the Japanese Yen.

  1. Currency intervention

A currency that weakens drastically can also have negative consequences.

For one, it makes imports more expensive, which means consumers in that country have to fork out more money to buy imported goods and services.

Again, when prices go up, demand/spending goes down.

Hence, a central bank may intervene to support its currency, like the Bank of Japan announced today (Thursday, sept 22nd).

And sometimes, markets are ready to react to the mere though of currency intervention, and not the actual “intervening” in and of itself, as was the case with the Swiss National Bank today.

With all that said, hopefully it is now clear what central bankers say and do often do have a massive impact on FX markets, as we’ve seen all of this week.

And there are more key decisions and announcements to be made in the months to come, seeing as this global battle against inflation is far from over.

So make sure you keep watching this space for the latest developments surrounding upcoming central bank decisions.

For more information visit FXTM.

Fed Goes Large Again With More to Come

Written on 20/09/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Fed to Ramp Up Hawkish Rhetoric

Markets expect the U.S Federal Reserve will hike the target range by another 75bps at its meeting tomorrow. This would make it three jumbo-sized rate hikes in a row and take the Fed Funds rate up to 3%-3.25%, which is nearing “restrictive territory”. There is much speculation about whether the FOMC raise rates by a monster 100bps, but markets are giving this less than a one in five chance of this happening. The extension of the “dot plots” through 2025 will offer much insight into how Fed officials view the evolving economic cycle.

The central focus for FOMC policymakers at present is fighting raging inflation and bringing price pressures back to the Fed’s target of 2%. Front-loading of interest rate rises has been the weapon of choice for tightening policy while quantitative tightening ramped up earlier this month to $95 billion per month.

The latest inflation data came in hotter-than-expected and shocked markets into further raising the chances of rates staying higher for longer. August CPI figures highlighted the persistent and sticky nature of inflation, driven by shelter prices which have a lagging effect and continue to rise.

Any chance of a “hike of the century”?

After the shock US inflation report last week, money markets went into overdrive and saw over a 30% chance of a 100bp rate hike at tomorrow’s FOMC meeting. That probability has now come down to around 17% according to the CME FedWatch Tool. We’ve had plenty of hawkish Fedspeak recently, but it does seem that a mega-hike would probably unnerve Wall Street as the Fed hasn’t been willing to take that step before.

A rate move of that size may also imply some panic at the world’s most important central bank. It would increase the likelihood that the FOMC will overtighten policy and decrease the chances of a soft landing.

Fed Statement and Dot Plot in Focus

The statement language will be guided by the latest Summary of Economic Projections, which were last released in June. Meaningful changes in expectations are anticipated with the forecast for the Fed funds rate shown in the dot plot expected to be more hawkish. The previous projections saw rates at 3.4% at the end of this year, followed by 3.8% by the end of 2023. Markets currently see rates peaking at 4.5% in March and to be cut to 4% by December next year. Inflation forecasts are likely to be lifted while growth estimates are lowered.

Market Reaction and the Dollar

The greenback has hit multi-year highs this year while risk markets have suffered as the rate hike cycle has ramped up with front-loading. Tighter monetary policy increases the headwinds for risk assets, and this should help support the dollar going forward. In the near term, a 75bp “hawkish hike” is the minimum expected by markets.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

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Is The US Dollar (finally) Peaking?

In short

Following the ECB’s 75 basis point hike, markets are preparing for a shift from monetary policy divergence, which had been supportive for the dollar, to monetary policy convergence. Aside from the ECB, the SNB and the BoE have also signalled their willingness to act more forcefully. This has certainly removed some appeal from the US dollar. Nonetheless, we doubt that USD could experience a significant drop in the short term as growth and recession fears continue to provide support.

US Dollar Near Decade Highs

The US dollar has surged dramatically against the world’s biggest currencies this year. The greenback is up 13% against the euro, 15% against the British pound, and 20% against the Japanese yen year-to-date.

Screenshot 2022-09-11 at 14.16.43

The US dollar index (DXY), which tracks the relative value of the US dollar against a basket of important world currencies, has surged to its highest level since 2002. The index has risen 15% this year, putting it on track for its biggest annual rise since 1981.

Underpinning the dollar’s seemingly unstoppable surge is the Federal Reserve, coupled with doubts about the global economy. To dampen rampant inflation, the US central bank has embarked on the most aggressive interest-rate hikes since the 1980s, raising interest rates by 2.25% since March. Looking at market pricing, traders expect this tightening to continue into 2023, with a ceiling near 4%.

Screenshot 2022-09-11 at 14.04.15

Resilient US Economy Boosts Dollar Demand

Another factor in favour of the greenback has been deteriorating growth perspectives overseas. The meteoric rise in USD, which has led to a weaker euro, pound and yen, has worsened inflation problems in Europe, the UK and Japan, and hence has heaped pressure on policymakers to follow the Fed with aggressive rate hikes.

But the reality is that while the Fed has the luxury of sounding hawkish as the US economic data remain resilient, other central banks, especially the ECB and the BoE, do not enjoy the same leeway as their economies are already struggling with consequences from the Ukraine war. Therefore, hiking rates in this region may just worsen the slowdown and increase the odds of recession. This is why investors have preferred to hold on to the dollar.

The renewed sell-off in Treasuries this month has also again widened the yield gap between the US and Japan, pushing the yen to a 24-year low and on track for its worst year on record. This has prompted the strongest warnings to date from senior Japanese officials. Finance Minister Shunichi Suzuki said « «We’ll keep watching the markets with a high sense of urgency, and if the moves continue, we’ll respond as needed».

Despite the salvo of official warnings last week, the comments were insufficient to reverse the yen’s slide in the face of intense dollar strength. Many analysts expect that a stronger ramping up of language or possibly the calling of a trilateral meeting between the Bank of Japan, finance ministry and financial regulator in response to the sharp slide could prove more impactful.

Technical Analysis

Looking at the EURUSD and bearing in mind that much bad news is already priced into the single currency (including geopolitics, inflation and increased recession risk) – a new near-term base may be seen near parity, with higher risks to the upside should the ECB deliver on its expected rate hikes while containing a crisis in the bond market.

Regarding sterling, after another 10% sell-off in GBPUSD throughout the first half of the year and a currency that looks historically cheap and undervalued, the pound is likely to underperform peers, given domestic economic problems and political distractions.

Considering the yen, chances for continued yield-driven underperformance are high. Indeed, a BOJ rate hike seems off the agenda for now. BOJ intervention threats may resurface, but only coordinated action, which we see as unlikely for now, can reverse the trend. Ultimately, a BOJ policy U-turn and/or softer Fed will alter the yen’s fortunes, but we aren’t there yet.

Risk

Overall, we expect the dollar to hold up well over the coming months, supported by high interest rates and a resilient US economy. Nonetheless, it should be noted that USD valuations are stretched, with the currency near a 20-year high against a basket of major currencies. Moreover, Fed tightening assumptions are at peak hawkishness, which indicates the rate hike cycle may be nearing its end stages.

Looking ahead

Inflation and central banks’ tightening plans should continue to drive G-10 forex, but as we enter 3Q, growth and recession considerations could take a central role for the dollar. And although the currency may be overvalued, this isn’t enough reason to give up on the buck altogether, as there is still too much macro, earnings and geopolitical uncertainty to abandon defensive views.

Esty Dwek, CIO

Trade Of The Week: Are USD Bulls Throwing In The Towel?

The mighty dollar has been an unstoppable force in 2022, flattening everything in its path.

But back in August, we questioned whether the king of the currency markets was losing its grip on the FX throne after the Dollar Index (DXY) punched above 109.14. Our argument was based on reduced bets over how aggressive the Fed will be on rate hikes and signs of easing inflationary pressures.

We were thoroughly humbled after USD bull’s stepped into higher gear, pushing the DXY to a fresh 20-year high beyond 110.00

There was also some action on the equally weighted dollar index which respected a bullish trend, pushing prices above the previous 2022 high of 1.21840.

Fast forward to today, king dollar looks shaky.

It is safe to say that it lost momentum last week and has stumbled into the new week under selling pressure. The greenback has weakened against most G10 currencies month-to-date and could extend losses despite the recent hawkish comments from Fed officials including Jerome Powell.

With inflation cooling in the US economy, this could encourage the Fed to drop its aggressive stance toward higher rates. If such becomes reality, dollar bears may receive the thumps up to enter the scene – dragging both the DXY and equally weighted USD index lower.

As we questioned roughly back in August, are dollar bulls throwing in the towel or just taking another break before ramping up the momentum in Q4? Some clues may be offered this week in the form of the US inflation figures among other key reports.

The Low Down…

Traders are predicting an 88% probability of a 75-basis point rate hike in September.

These expectations were reinforced by comments from Federal Reserve Chairman Jerome Powell who reaffirmed the need to fight soaring inflation. Hawkish comments by Fed officials last Friday also boosted Fed hike bet, making the jumbo rate hike this month almost a done deal.

Interestingly, the greenback has tumbled despite the Fed expected to hike rates by 75 basis points for the third time in a row. Fed hawks are clearly in the building while strong US economic data initially supported expectations that the US central bank would not be slowing the pace of hike anytime soon. However, US inflation likely slowed for a second month in August thanks to falling gas prices. While this may not be enough to derail the Fed from firing another monetary bazooka this month, it may impact the central bank’s decision in November and December.

The Week Ahead…

This could be another wild week for the dollar due to the pending US economic reports.

On Tuesday, the latest inflation figures will be published which are expected to show consumer prices cooling 8.1% year-on-year in August. This would be lower than July 8.5% print and would mark two straight months of easing in the headline annual print. Should the report match expectations, this could allow the Fed to drop its aggressive approach toward rate hikes – resulting in a weaker dollar.

It will be wise to keep an eye on the core CPI annual print which is expected to rise 6.1% – which will be the highest level since April. The core inflation does not include food and energy prices in the calculation because of volatility.

Much attention will be directed towards the weekly initial jobless claims, August retail sales, and industrial production figures on Thursday which could provide further insight into the health of the US economy. A strong set of reports may reinforce rate hike bets which is dollar positive, while a negative set of reports could dampen aggressive rate hike expectations – dragging the dollar lower.

Friday offers the US consumer sentiment for September. Consumer sentiment was revised higher to 58.2 back in August and is expected to hit 60 this month. A positive figure could provide USD bulls a helping hand before the week comes to an end.

Time For Dollar to Tumble?

After failing to secure a weekly close above 1.2184, the equally weighted dollar index could be preparing to tumble lower.

Prices remain under pressure on the weekly charts with a solid breakdown below 1.1900 opening a path toward 1.1700 and 1.1600, respectively. Should 1.1700 prove to be reliable support, a rebound back towards 1.1900 could be a possibility.

For more information visit FXTM.

Treasury Yields Rise, Dollar Index Closes Above 110 Pressuring Gold Lower

Is The U.S. Dollar Really Getting Stronger?

Well before the Federal Reserve enacted its first interest rate hike in March the dollar has been on a dynamic upside surge. In July 2021 the dollar index traded to a low of 89.45 and in just over a year moved to a 20-year high with the dollar index currently trading above 110. When analysts talk about dollar strength it is a little misleading on the surface.

US Dollar Index

The dollar has lost value and continues to lose value in terms of its buying power. With inflation running over 8% the cost of goods and services continues to mean that the United States dollar has less buying power than it did a year ago, five years ago, or 20 years ago.

The dollar index’s strength represents the dollar as it relates to the basket of six currencies it is paired against. Within this foreign currency basket, certain ones carry more weight. The Eurodollar for example accounts for 56.7% by far the largest component of the index. The Japanese yen is weighted at 13.6%, the British pound at 11.9%, the Canadian dollar at 9.1%, the Swedish krona at 4.2%, and the Swiss franc is weighted at 3.6%.

Because the vast majority of countries have been devaluing their fiat currency by creating excessive monetary supplies, the dollar has been depreciating less than the other currencies it is paired against. So, the term “dollar strength” is simply a measurement of foreign-exchange values of the U.S. dollar when compared against the foreign currencies contained in the dollar index.

As the U.S. yield of debt instruments such as 30-year Treasury Bonds or 10-year Treasury Notes rises a byproduct is that it moves the dollar index higher. That is exactly what we have been seeing as the Federal Reserve continues to raise rates aggressively.

Gold and U.S. Dollar Today

Gold monthly chart

As of 6:10 PM EDT gold futures basis, the most active December 2022 Comex contract is fixed at $1712.80 which is a net decline of $9.80 or – 0.56%. Concurrently the dollar index is currently up 71 points or 0.65% and fixed at 110.22. This means that there was fractional buying in gold today however, a strong dollar accounted for any fractional gains from buyers bidding gold higher and the totality of today’s $9.70 decline in gold.

Today’s high of 110.55 is the highest level in the dollar index in the last 20 years. On a technical basis, there are no strong areas of resistance between 110 and 120 which is the highs the dollar ran to in 2001.

At some point, the dollar will retrace but as long as the Federal Reserve continues to raise interest rates higher U.S. debt yields will rise. Higher yields will certainly continue to be highly supportive of dollar strength.

For those who would like more information simply use this link.

Wishing you as always good trading and good health,

Gary S. Wagner

How Does the US Dollar Typically Fare in September?

DXY Historical Performance in September

Since 2017, this month has seen an average monthly gain of 0.9% for DXY, second only to February’s 0.99% average climb.

Here’s how the greenback has fared historically against its major peers over the past five Septembers (2017-2021):

  • USDJPY: The Japanese Yen is typically the worst-performing DXY constituent for the month.
    JPY sees its largest monthly drop against the US dollar for the year in September, at a whopping average of 1.43%!
    That’s far higher than second-placed June’s 0.86% monthly decline
  • EURUSD: Euro typically weakens against the US dollar this month by 1.06% on average.
    The shared currency’s woes in recent years are in stark contrast to the longer-term context, with the world’s most-traded currency pair enjoying an average September gain of 0.60% over the past 30 years.
  • GBPUSD: The Pound has had mixed fortunes, with a negligible drop of just -0.03% on average.
    The Septembers of 2017-2019 registering monthly gains that offset the monthly declines over the past two straight Septembers.

Note that EUR and JPY are the two largest constituents of the benchmark Dollar index, making up a combined 71.2% of the DXY.

Here are the weightings of the currencies that make up the benchmark DXY:

  1. Euro (EUR) = 57.6%
  2. Japanese Yen (JPY) = 13.6%
  3. British Pound (GBP) = 11.9%
  4. Canadian Dollar (CAD) = 9.1%
  5. Swedish Krona (SEK) = 4.2%
  6. Swiss Franc (CHF) = 3.6%

Hence, the seasonal declines for EUR and JPY are enough to offset Sterling’s relatively resolute performance in recent Septembers, pushing the DXY up higher.

US Dollar Forecast for September

Now onto a forward-looking note, this month is set to be no different from the 5-year trend.

The US dollar is expected to register further gains in September 2022, even as DXY now trades around its highest levels in 20 years.

US Dollar Index daily chart

And here’s what markets are forecasting may happen for the US dollar versus its major peers by the end of this month:

  • EURUSD: 59% chance of hitting 0.985
  • USDJPY: 70% chance of reaching 141.0
  • GBPUSD: 87% chance of touching 1.15

For brevity’s sake, we shall keep the fundamental outlooks for these respective major currencies for future articles (do keep checking our Daily Market Analysis page for the key events and reasons that move FX markets).

Suffice to say that, as we enter this new month, it’s rather evident from a fundamental perspective that the US dollar is at least set to remain well-supported in the lead up to Q4, at the expense of the rest of the FX world.

CHF Supports Not Waning Yet | USD/CHF & EUR/CHF

The reversal in fortune for the Swiss Franc has been one of the more interesting market stories this year. Following initial weakness as the US Dollar soared higher over Q1 & Q2, the Swiss Franc has since rebounded almost 7% against the DollarAgainst the Euro, the Franc has climbed almost 10%.

As we begin to move into the second-half of the year, traders are wondering whether the strength in CHF is likely to continue, or if a reversal is on the cards? With that in mind, it’s important to take a look at the factors which have been driving CHF this year and whether they are likely to continue to support the currency or if a change is likely.

Factors Driving CHF So Far This Year

  • Changing SNB narrative
  • Shifting risk flows

Changing SNB Narrative

The main factor driving the current rally in CHF has been the shift in SNB narrative we’ve seen this year. Over the early part of the year, the SNB reaffirmed its commitment to maintaining an easing presence in the markets, despite soaring global inflation and many other central banks embarking on a tightening path. This message saw huge capital outflows from CHF as rising rate projections in other economies attracted demand away from CHF.

However, as we moved through Q2, the SNB began to shift its view, raising its inflation forecasts over the year and warning of the need to intervene to help quell rising prices. Then, in a major twist, the SNB announced a surprise rate hike in June, lifting rates from -0.75%, the lowest in the world, to -0.25%. This move front-ran the anticipated ECB hike in July and fuelled a major rally in CHF across the board, most notably against those currencies which had previously been supressing CHF.

Shifting Risk Flows

With the SNB hiking rates and signalling further hikes to come, along with removing its usual language around excessive franc strengthening, CHF saw a fresh influx of safe-haven demand. Prior to the move by the SNB, JPY had been the safe-haven of choice, along with USD. However, the fresh surge of demand on the back of the rate-hike saw capital rotating out of other safe haven areas, including gold, and into the Swissy.

Upside Risks for CHF

Looking ahead, there is good reason to anticipate further CHF strengthening. The shift in narrative at the SNB represents a major change in the global financial system, given the SNB’s prior status of having the lowest rates globally. As the SNB continues to lift rates, particularly if/when rates turn neutral/positive, this will draw further capital inflow to CHF.

Potential “Fed Pivot”

Alongside this, there is now a growing conversation around the Fed potentially slowing down on rates. With economic activity having remained in negative territory in Q2 and with recent CPI data showing that inflation slowed last month, many players are now repricing their Fed rate projection over the remainder of the year. If the Fed does slow down on rates and the focus on the recession grows in prominence, this will no doubt act as a downward catalyst for USD, bolstering demand for CHF.

Risk Backdrop to Remain Supportive

Furthermore, the risk backdrop which has been supporting CHF looks set to continue to add support. While global stocks are currently rallying the re-pricing of Fed rate hike expectations, if focus begins to land more on the risks of a global recession, this is likely to see stocks begin to slide, driving greater safe-haven demand towards CHF.

With the Russia-Ukraine war showing no signs of ending near-term, and with the negative impacts of the war growing as time goes on (energy prices rising, supply issues driving inflation), risk appetite remains highly vulnerable to further downside shocks. With this in mind, CHF look likely to continue to rally against EUR which is bearing the brunt of the war due to the eurozone’s specific economic exposure to Russia and Ukraine.

Let’s take a look at the technical layout for both USDCHF and EURCHF.

USD/CHF – Weekly Chart 

The break below the .9540 level was a significant technical development. However, the breakdown was immediately rebuffed by demand at the .9375 level. With price still above the bullish trend line from 2021 lows, traders need to monitor the current resistance. A break back above here will turn focus to the .9640 level next. To the downside, a break of the support and trend line will open the way for a move down to .9100

 

Chart, line chart Description automatically generated

 

EUR/CHF – Weekly Chart

The bearish channel in EURCHF has seen the market breaking down below several key support levels. With price now trading below the last support at the .9780 level and below the bear channel low, the outlook remains heavily bearish. Bulls will need to see a break of the 1.0100 level to affect a shift in sentiment for the pair.

 

Chart, line chart, histogram Description automatically generated

ESTY DWEK – CIO

The Dollar Index at Its Highest Level Since 2002

Once again it has hit an almost new high of 2022 at 108.85 (at the time of writing), which is just shy of the 109.14 recorded on July 14th. The last time we saw numbers like these was back nearly 20 years ago in December 2002, when the dollar was performing extremely strongly relative to most other currencies, and was just shy of 119 at its peak.

Daily chart of the Dollar Index (September 2022) – Source: ActivTrader platform

So what’s the driving force behind the increase in value this year? Will it go higher? Let’s take a look at some of the background and stats for the USDX.

What Is The Dollar Index?

The USDX was originally introduced in 1973 by the U.S Federal Reserve, during that time it included the German mark, Dutch glider, French franc, Italian lira, Belgian franc, Swiss franc, Japanese yen, Canadian dollar, British pound, and the Swedish krona, until it was adjusted for the first and only time in 1999 when the Euro came into use and replaced some of the previous currencies.

The collection of currencies that remain in the index is generally thought of as a representation of the most significant U.S trading partners, and the underlying point of the index itself is to measure the value of the U.S dollar against those currencies.

The USDX has had since its inception, as it does now, a base of 100, and throughout its history has experienced many highs and lows depending on a variety of factors. If the index value goes above 100, then that is suggestive of an appreciation of the USD relative to the other six currencies. If the index is losing strength against the other currencies then it will be below 100. In 1984, the USDX hit a record high of almost 165. Conversely, 2007 saw the index drop to a low of nearly 70 at the beginning of the financial crisis.

It can be affected by a myriad of factors, mostly macroeconomic in nature; inflation, deflation, interest rates, economic growth or lack thereof, supply and demand, and major world events, among others. Any factor that would influence each individual currency in the index and/or the USD can affect the overall USDX.

It’s also really important for traders to take some notice of the weightings given to the currencies within the index, as price movements on one currency, like the Swiss Franc, for example, will have far less significance than if the same movements were to occur with the Euro. They’re not close to being on equal footing within the index, so the impacts would be different.

The weighting given for each currency is as follows:

  • Euro (57.6%)
  • Japanese yen (13.6%)
  • British pound (11.9%)
  • Canadian dollar (9.1%)
  • Swedish krona (4.2%)
  • Swiss Franc (3.6%)

Why Has the Dollar Index Recently Reached New Highs?

Slowly over the last few months, amid numerous rate hikes by the Federal Reserve, the US dollar has been rising. Policymakers have cautioned that the country’s difficulties with soaring inflation will continue to be met with aggressive tightening of monetary policy over the coming months, regardless of a short recession as a likely side effect.

Mildly positive economic data in recent weeks has given many experts reason to question whether the Fed can start to reduce the rate of hikes at the coming meeting, with Reuters reporting recently that a poll of economists indicated that a move of 50 basis points was now slightly more feasible than the previously expected 75 basis points move for the Fed’s next meeting in September.

Fed Chair Jerome Powell, who will be present at the Jackson Hole symposium this year on August 25th-27th, will be updating the market on his views of the ongoing situation with the economy and the Fed’s role in stabilizing inflation. The economic event, located in Jackson Hole, Wyoming, United States, is closely followed by traders, as statements from prominent central bankers, leading financial players, ministers and academics can be impactful on stocks and currency prices.

In addition to conditions in the U.S, the euro has hit fresh lows this month after Russia declared that there would be a three-day closure of the Nord Stream 1 pipeline at the end of August, which is the main supply of gas to the Eurozone. This puts further pressure on the already strained situation, with energy prices in the region skyrocketing and inflation continuing to soar.

How to Take Advantage of the Dollar Index

There are a number of ways to trade the USDX by using derivative products for example, such as contracts for difference, spread bets, or futures, and it’s also available as part of some ETFs and mutual funds.

Using CFD with regulated brokers like ActivTrades allows the trader to utilize margin trading to take advantage of price movements heading upwards (long positions), as well as price movements heading downwards (short positions).

Some traders use the index as a means to hedge against any downside risk with the USD, or to speculate on the dollar’s movement against the other major currencies as well. When the outlook is unclear regarding the movements of the U.S. dollar, the USDX can generally provide a clearer picture.

However you choose to invest, and the financial products you prefer to use, it’s important to follow your overall trading strategy with strict money management rules, and only invest money you’re prepared to lose.

Trade of the Week: USD Index Back Above 1.20?

Shame on those who doubted the Dollar (at least of late).

The greenback has staged a recovery and is on a quest to revisit recent highs, as markets restore their bets for an ultra-hawkish Fed.

As a result, major G10 currencies are wilting under the weight of the resurgent buck:

  • EURUSD is flirting with parity again, having last done so in mid-July.
  • GBPUSD also hit a one-month low, trading around levels not seen since the onset of the pandemic.

Such moves are captured within the equally-weighted US Dollar index, which measures the greenback’s performance against these six G10 currencies:

  1. GBP
  2. EUR
  3. CHF
  4. CAD
  5. AUD
  6. NZD

As a result, this USD Index is retesting the mid-1.19 resistance levels which had previously repelled dollar bulls in mid-May and mid-June, also around where the 61.8% Fibonacci retracement level currently sits from its July-august descent.

Whether or not the US dollar can punch higher and break above the psychologically-important 1.20 level could well depend on what’s conveyed out of the Jackson Hole Economic Symposium later this week.

What is the Jackson Hole Symposium and Why It Matters?

Organized by the Kansas City Fed, this year’s gathering will be held from August 25th – 27th in Jackson Hole, Wyoming (though recent symposiums have been held virtually as well due to the pandemic).

This annual conference features the top central bankers, economists, academics, and even government representatives, where they discuss the most important issues facing the global economy, as well as how policymakers could and should respond.

In other words, what is said during this closely-watched symposium has the potential to prompt market participants to move trillions of dollars across asset classes including stocks, bonds, and currencies.

And Fed Chair Jerome Powell’s speech that’s scheduled for this Friday, August 26th, at 2:00 PM GMT, is set to dominate the market’s collective attention this week.

What Powell says (or doesn’t say) could dictate how global markets perform in the weeks ahead.

What Markets Want to Know Out of Jackson Hole?

Markets want to know how much the Fed intends to raise US interest rates for its September meeting, and beyond.

1) As things stand, markets are forecasting a 63.7% chance of yet another 75-basis point (bps) hike by the Fed at its September policy meeting.

Those odds have been increased substantially from 46.8% just from this time last week. Hence, the US dollar rising over the past week in tandem with such restored bets.

If the Fed does proceed with yet another 75bps hike, that would be its third successive supersized hike, following similar 75bps hikes at each of the Fed’s policy meetings back in June and July.

2) Markets also presently believe that that US benchmark rates could go up as high as 3.7% by May 2023, as the Fed continues aggressively raising interest rates to combat multi-decade high inflation.

Major deviations from the above (the existing narrative that markets are holding on to at present) should result in major moves for the US dollar.

Potential Scenarios for USD Index

  • Should Powell signal that the Fed has to stay aggressive to bring down US inflation (think more 75bps hikes in Q4), that could mean more immediate gains for the US dollar.If the 1.20536 Fibonacci level can be conquered, then this equally-weighted USD Index could be on the path to revisit the mid-July peak above 1.21.
  • However, if Powell officially signals that the Fed can start to ease up on its rate hikes on signs that US inflation has peaked, that could prompt the unwinding of last week’s gains for the US dollar.Support may arrive at the:
    -previous cycle high of 1.19102, followed by …
    -the next Fib line below at 1.18769
    -50-day simple moving average around 1.183

Despite the Fed’s suggestions to pay less attention to what it says it will do (forward guidance is less meaningful over the immediate term), but instead pay greater heed to the incoming US economic data (such as nonfarm payrolls and CPI), that likely won’t be enough to dissuade forward-looking investors and traders worldwide from reacting to Powell’s policy clues.

In short, don’t be surprised if we see heightened volatility for the US Dollar and the rest of the FX universe as the Jackson Hole symposium looms.

For more information visit FXTM.

Thursday Special: My Trading Week

Before we proceed, I know some of you are wondering what is going on here. Well, I have hijacked the Thursday 101 slot to share my thoughts and personal experiences with markets this week!

While this may not follow the normal style of our market reports, we still aim to provide key insight and information on market themes complemented with some trading setups to watch out for.

Game plan #1 – USD Hunting Gone Wrong

I marched into the trading week heavily equipped with the fundamental knowledge and technical weapons to hunt dollar bulls. With signs of easing inflationary pressures in the United States fuelling speculation around the Fed adopting a less aggressive approach towards rates, the dollar looked like an easy tasty meal. However, the greenback drew ample strength from weak Chinese economic data on Monday – eventually trampling all obstacles and G10 currencies in its path.

The bearish dollar setup I had in mind was blown out of the water. Instead of the Dollar Index (DXY) respecting the daily bearish channel, prices pushed above 106.00, signalling an incline back towards 107.30.

The same could be said for the equally-weighted dollar index which blasted back above 1.1700. Prices seem to be finding resistance around the 50-day SMA. It will be interesting to see whether this level limits further upside gains.

Game plan # 2 – If You Can’t Beat Them…Join Them

After witnessing the dollar’s rebound on Monday, I decided to hitch a ride with bulls on Tuesday.

The EURUSD snatched my attention as prices tumbled back below 1.0200. Even though the currency pair remains in a range, the path of least resistance points south with 1.0100 acting as the first level of interest. Looking at the current price action, we are not expecting any fireworks for the rest of the week. But bears seem to be creating a foundation for a steeper decline in the week ahead.

Game plan #3 – Inflation Heartache Boost BoE Hike Bets

On Wednesday morning I felt nauseous and uneasy after official data revealed that UK inflation rose 10.1% in July. As the inflation menace causes havoc across the UK economy, households are feeling the squeeze. Everything from the price of food, energy, and services is increasing dangerously. Yesterday evening I witnessed a man argue with a shop owner over the price of bread and this morning I found myself in a heated conversation with my energy provider.

Rising inflation will most likely force the BoE to aggressively raise interest rates but will also fuel uncertainty over the UK’s economic outlook. Looking at the GBPUSD, it remains in a range on the daily chart with support at 1.2000. Best to revisit this next week when more life returns to the FX space.

Game plan #4 – Riding the Volatile Yen Wave

Hats off to my intraday traders that were able to tame the Yen beast this week.

The EURJPY and GBPJPY were untamed and ready to dish out punishment to any trader unprepared. Both tumbled on Monday, only to experience a sharp rebound on Tuesday and Wednesday! We can see some resistance around 138.00 for the EURJPY and 164.00 for the GBPJPY. Should these levels hold, the currency pairs could resume their descent in the new trading week.

Game plan #5 – Classic Breakdown on Gold

The last time gold secured a daily close below $1770 was at the start of the month. After flirting within a range for almost three weeks, it looks like the precious metal is ready to move lower. Interestingly, the precious metal somewhat ignored the minutes from the Fed’s July meeting.

Policymakers saw inflation as a significant risk to the economy and indicated they would not pull back on rates until inflation came down. With inflation in the United States cooling to 8.5% in July, traders have cut bets over how aggressive the Fed will be on rates. In fact, markets are currently pricing in a 47% probability of a 75bp rate hike in September.

Talking technicals sustained weakness below $1770 could open the doors towards $1752 and $1724, respectfully.

For more information visit FXTM.

Trade Of The Week: Are Dollar Bulls Running On Empty Fumes?

Dollar bulls dominated the FX space during the first half of 2022, trampling any obstacles that came their way. G10 currencies were practically flattened by the greenback’s might with the pound shedding 10% and yen over 15%.

But the scales of power seem to be veering in favour of bears in Q3 as the fundamental drivers shift. This can be reflected in the currency’s mixed performance since the start of July.

After reaching its highest level since mid-2002 back in July, the Dollar Index (DXY) has found itself vulnerable to losses thanks to profit-taking. Reduced bets over how aggressive the Fed will be on rate hikes and signs of easing inflationary pressures also capped upside gains.

Taking a quick look at the equally weighted dollar index, prices staged a rebound this morning as disappointing data from China fuelled global recession fears. Nevertheless, the trend still favours bears due to the consistently lower lows and lower highs.

With inflation cooling in the largest economy in the world and investors cutting rate hike bets, USD bulls may be in trouble. However, recession fears and geopolitical risks could send investors rushing toward the dollar which acts as a beacon of safety in times of uncertainty.

So, are dollar bulls are running on empty fumes or taking a break before switching to higher gear? While we may not get the answer this week, the pending FOMC meeting minutes, US economic data, and speeches from Fed officials could offer fresh insight.

The Low Down…

There were three major drivers behind the dollar’s appreciation this year.

  1. Interest rates
  2. Strength of the US economy
  3. Dollar’s safe-haven status

The Fed’s aggressive approach towards rising interest rates in the face of soaring inflation sent the dollar rallying as rate differentials widened against other currencies. As investors looked at the strength of the US economy, relative to others this also boosted appetite for the greenback. Lastly, geopolitical risks, global growth concerns, and overall uncertainty sent market players rushing toward the world’s reserve currency.

Fast forward to today, signs of easing inflationary pressures have prompted investors to cut bets on how aggressive the Fed will be in raising interest rates. The latest CPI figures revealed inflation cooled 8.5% in July compared to the 8.7% expected and a significant drop from the 9.1% increase in June.

In regards to the US economy, it contracted for the second straight quarter in Q2, signalling an unofficial start of recession, further dampening appetite for the dollar. Given the unfavourable macroeconomic environment and geopolitics at play, investors remain cautious and this could result in increased appetite for the safe-haven dollar. All in all, when considering how 2/3 of the major drivers powering the dollar have weakened, this could encourage bears to pounce.

The Week Ahead…

It could be a volatile week for the dollar thanks to the pending US reports and speeches from Fed officials.

However, all eyes will be on the Federal Reserve meeting minutes on Wednesday. This will be closely scrutinized by investors for any fresh clues and insight into what policymakers were thinking when rates were hiked by 75 basis points for a second straight meeting. If the minutes sound hawkish, this could offer the dollar some support.

On the flip side, any hint of doves may encourage some fresh dollar weakness. It will be wise to keep an eye on the US retail sales report for July published mid-week and speeches by Kansas City Fed President Esther George and Minneapolis Fed President Neel Kashkari on Thursday.

Dollar to Resume Decline?

After breaking out of the weekly bearish channel, the equally weighted dollar index could be gearing for steeper declines.

Prices turned bearish after securing a solid weekly close below 1.1700. Sustained weakness under this level could trigger a selloff towards 1.1380.

Should 1.1700 prove to be reliable support, a move back towards 1.1900 could be on the cards.

On the daily charts, prices punched higher this morning thanks to fundamental forces but the technical picture still favours bears. A move back below 1.1700 could suggest a decline towards 1.1630 and 1.1450. Should 1.1700 prove to be reliable support, prices may test the 50-day Simple Moving Average and 1.1950, respectively.

For more information visit FXTM.

Week Ahead: Persistent Inflation to Revive Dollar Bulls?

Inflation angst could make its jarring presence felt once more, as the upcoming US inflation data release holds court amidst the coming week’s global economic calendar:

Monday, August 8

  • AUD: Australia July foreign reserves
  • NZD: New Zealand 3Q 2-year inflation expectation

Tuesday, August 9

  • AUD: Australia July household spending, August consumer confidence
  • Coinbase 2Q earnings

Wednesday, August 10

  • CNH: China July CPI, PPI
  • USD: US July consumer price index (CPI), speeches by Chicago Fed President Charles Evans, Minneapolis Fed President Neel Kashkari
  • US crude: EIA weekly oil inventory report
  • Disney 2Q earnings

Thursday, August 11

  • AUD: Australia August consumer inflation expectations
  • USD: US weekly jobless claims, July PPI, speech by San Francisco Fed President Mary Daly

Friday, August 12

  • GBP: UK June GDP, industrial production; 2Q GDP, external trade
  • EUR: Eurozone June industrial production
  • USD: US August consumer sentiment

For the US July consumer price index (CPI), the median estimate from the Bloomberg survey comes in at 8.8%.

If so, that would mark a moderation in the headline inflation print from June’s 9.1%, after four consecutive months of the headline CPI print exceeding market forecasts.

Signs of easing inflationary pressures may allow the US Federal Reserve to start backing off from its aggressive rate-hiking stance, having already raised interest rates by a cumulative 225 basis points since March.

Markets are expecting just another 100 basis points to go in this ongoing rate hike cycle, before the Fed then reversing course by mid-2023 to avoid tipping the US economy into a recession.

In other words, markets think that the “largest chunks” of the Fed’s hiking cycle are already behind us.

Such a narrative has put the US dollar in the back seat in recent weeks, in turn allowing risk assets such as stocks and cryptos to stage a recovery.

(Note that such expectations may alter significantly later today – Friday, August 5th – given that this article is being written before the release of the July US nonfarm payrolls report).

US dollar pulls away from multi-year high

Since posting a 2-year high on July 14th, the equally-weighted US dollar index has faltered back to its 50-day simple moving average (SMA).

This USD index measures the US dollar’s performance against six other major currencies, all in equal proportions:

  • NZDUSD
  • USDCAD
  • GBPUSD
  • USDCHF
  • AUDUSD
  • EURUSD

How might the upcoming US CPI print impact the dollar?

A lower-than-expected CPI print may prompt this USD index to fall below its 50-day SMA and test the 1.16832 – 1.17090, being its recent cycle low and a key Fibonacci retracement line since its ascent from early April.

Otherwise, a fifth-consecutive upside surprise in the official CPI data, that forces markets to restore their bets for more larger-than-usual Fed rate hikes in the pipeline, may see the USD index climbing back above its 50-day SMA.

Immediate resistance can be seen around the 1.18913 Fibonacci level, with stronger resistance set to arrive at the “twin peaks” around 1.195.

Pay attention also to the roster of Fed speak in the coming week, which may offer greater insights into how Fed officials interpret the path forward for US interest rates.

Fresh meaningful insights into the path forward for US interest rates are set to sway the greenback, which in turn would reverberate across the FX universe.

For more information visit FXTM.

Week Ahead: USD/CHF to Fall on US Recession Fears?

But that doesn’t mean market volatility is now done and over with.

Markets are set to remain jumpy as we enter the first full trading week of July, with recession fears still clouding broader sentiment.

Calendar for next week

For the week ahead, the US nonfarm payrolls report is set to grab the spotlight in a holiday-shortened week for markets stateside, amid these scheduled global data releases and events:

Monday, July 4

  • AUD: Australia June inflation gauge
  • EUR: Germany May trade data
  • CHF: Switzerland June inflation
  • CAD: Canada June manufacturing PMI
  • US markets closed for Independence Day

Tuesday, July 5

  • CNH: China June Caixin Services PMI
  • AUD: Reserve Bank of Australia rate decision
  • EUR: Eurozone June services PMI
  • USD: US May factory orders and durable goods

Wednesday, July 6

  • GBP: Speeches by Bank of England Chief Economist Huw Pill, and Deputy Governor Jon Cunliffe
  • EUR: Eurozone May retail sales, Germany May factory orders
  • USD: FOMC minutes, June services PMI

Thursday, July 7

  • AUD: Australia May trade balance
  • EUR: ECB meeting minutes, speeches by ECB Governing Council members, Germany May industrial production
  • USD: US weekly initial jobless claims
  • US crude: EIA weekly US crude inventories
  • USD: Fed speak – Fed Governor Christopher Waller, St. Louis Fed President James Bullard

Friday, July 8

  • CAD: Canada June unemployment rate
  • USD: US June nonfarm payrolls

The “r” word (recession) is set to continue dominating market chatter in the latter half of the year, as the Fed raises interest rates in order to rein in inflation that’s at multi-decade highs.

Fed Chair Jerome Powell argued that more unemployed Americans could be what’s needed to ultimately cool inflation down to the Fed’s 2% target (the May US consumer price index came in at 8.6% – its highest since December 1981).

What are markets expecting for the next US jobs report?

The median estimate by economists for this coming Friday’s June US nonfarm payrolls report:

  • Unemployment rate: 3.6%
  • Jobs added: 250,000 (which would mark the lowest US jobs growth since 2019).

Ultimately, policymakers at the US central bank are aiming for some demand destruction, with the unemployment rate forecasted to move up to 4.1% towards the end of 2024 – a forecast that some segments of the market think is still too optimistic.

Why is the Swiss Franc strengthening?

The Swiss Franc is the only G10 currency to register an advance against the US dollar in June, with USDCHF dropping by 0.46% last month. CHF also registered a monthly advance in June against all of its G10 peers.

Besides being widely viewed as a safe haven currency, CHF’s strength has been fuelled of late by the Swiss National Bank’s hawkish surprise in June. The central bank unexpectedly raised interest rates by 50-basis points – its first hike in 15 years, while signalling more hikes to come.

Switzerland’s June consumer price index announcement on Monday could also spur more gains for the Swiss Franc, especially if its CPI print comes in above the estimated 3.1% figure, which would be its highest levels since July 2008.

Recession fears could fuel demand for safe-haven Swiss Franc

Back to the headline-grabbing NFP, should the US jobs market continue showing signs of softening, either by way of a higher-than-3.6% unemployment rate, or a lower-than-250k headline NFP figure, that could heighten expectations that the world’s largest economy is destined for a recession sometime in the latter part of 2023.

More risk aversion may result in lower US Treasury yields that dampen the US dollar, in turn potentially allowing the Swiss Franc – a traditional safe haven – to strengthen instead.

USD/CHF to break below key 100-day SMA support?

Looking at the charts, USDCHF has found support at its 100-day simple moving average on a couple of occasions over the past 3 months.

Another gust of risk aversion, especially amid elevated fears of a US recession, could see USDCHF breaking below that key support level to revisit its mid-March peak at 0.946.

Though of course, a hawkish surprise out of the mid-week FOMC minutes from its June meeting, when the Fed triggered a jumbo-sized 75-basis point hike, could undermine the case for a lower USDCHF.

For more information visit FXTM.

The Story for the Swissie

Professional forecasters and central banks have been surprised by the persistence of rising prices, with the latter rapidly shifting their forward guidance. The Swiss National Bank (SNB) has just announced a policy normalization, surprising markets with a 50-basis point hike. What will this mean for the Swiss franc?

In short: 2022 has given investors a lot to chew on. But among many developments of this year, one really stands out; It’s inflation and the impact that high inflation has had on central bank policy. The USDCHF, known as the Swissie, rose to multi-month highs, briefly crossing above parity because of rising yields in the US, but fell nearly 3% after an unexpected 50bps rate hike from the SNB. Similarly, EURCHF which received a boost from the ECB early in the month, slid more than 2% to retest its previous support level.

From a fundamental perspective, odds are in favor of a stronger Swiss franc. EURCHF weakness is set to continue despite ECB’s policy normalisation as the risks of an economic slowdown in the Old Continent are rising. And though the war in Ukraine is weighing on the CHF against the USD, we expect the Swissie to ultimately mean revert, as we expect inflation to start cooling off in the US, removing pressure on the Fed to pursue its aggressive policy.

FX markets vs Equity markets

Geopolitical tensions and concerns about stagflation have dominated financial markets this year, pushing investors away from riskier assets. The EURCHF was tracking the underperformance of the German DAX index compared to the more defensive Swiss SMI index for much of the past year, with the pair trading at one point near parity.

But recently, even as risk appetite is back in the markets, the EURCHF is on the fall as the SNB didn’t show hesitance to firmly raise rates by 50bps. Why is the SNB not worried about a stronger CHF? On one hand, the high level of inflation in the Eurozone compared to inflation in Switzerland reduces the negative impact of a stronger CHF, taking off pressure on the Swiss National Bank (SNB) to intervene heavily in the FX market.

On the other hand, a rapid appreciation of the EUR against the CHF would undermine SNB’s price stability mandate, the reason why the governor of the SNB announced similar plans (if not more bullish), challenging speculative bets on a stronger EUR against the CHF.

ECB’s policy normalisation is positive for the euro, but not enough. Now that the war is escalating, with Russia cutting off gas supplies and the EU agreeing on a partial ban on Russian oil imports, the risks of higher for longer EU inflation have increased.

ECB

European consumers saw inflation (CPI) increase by 8% in May, and European producers saw input prices surge close to 37% year-over-year. These record numbers put enormous pressure on ECB to raise rates significantly to lower the burden of imported inflation. The current market pricing for the ECB terminal rate stands at 1.76%.

This implies ECB’s expected tightening policy is around 0.30% above the neutral rate (estimated at 1.5%). Historically, that has not been enough. In the early 90s, the Banque De France pushed 5-year French government bond yields more than 200bps above the prevailing levels of neutral nominal rates to avoid the de-anchoring of inflation expectations. Should the ECB find itself in such a situation, this significantly increases the risk of a recession in the eurozone and consequently the risk of a weaker EUR.

The battle between the bulls and bears

A terrific chart setup does not always require fancy lines, zones, and indicators. Looking at the USDCHF graph, the sentiment was quite bullish for the USDCHF in the second quarter of 2021, period during which USDCHF briefly broke above parity driven by higher real yields in the US. Though recently, dollar bulls seem caught by surprise. The pair fell almost 3% when the SNB announced a shocking but robust 50bps rate hike, squeezing short bets on the Swiss franc.

Lately, the price is oscillating around 0.9650 just below the 0.50 Fibonacci retracement level (0.97), suggesting an intense ongoing battle between the bulls and bears. Any move above or below is likely to signal the beginning of another trend in the pair.

However, traders need to be cautious of the bearish trend of the dollar. From a longer-term picture, the Swiss franc remains cheap versus the dollar as Switzerland has consistently had a current account surplus of roughly 8% of GDP, way above the level of deficits that the US government has reported for decades.

In addition, after rocketing higher over the past year, economists do expect US inflation to moderate for the rest of 2022. We’re seeing encouraging signs that some of the worst disruptions to supply chains are easing, the cost of freight is declining, many retailers are now reporting plenty of inventory, and market-based estimates of future inflation have been declining in the US.

If this trend of moderating inflation can hold, this would remove the market’s fear of an extreme 1970s-style scenario, and hence reduce pressure on the Fed to pursue a very aggressive policy, something that is starting to be priced in by Treasuries as yields on the 10-years US government bonds are pulling back from June highs.

U.S. Dollar Index (DX) Futures Technical Analysis – BOJ Policy Decision Could Set Friday’s Early Tone

The U.S. Dollar closed sharply lower against a basket of major currencies on Thursday as traders continued to digest the impact of the Federal Reserve’s decision to hike interest rates by 75 basis points on Wednesday. The price action suggests that traders may believe the Fed is trying to cause a recession in order to slow down the economy and gain control over inflation.

The greenback was also pressured by strong rallies in the British Pound and Swiss Franc after the Bank of England (BOE) and the Swiss National Bank (SNB) hiked their interest rates as well to combat inflation.

On Thursday, the September U.S. Dollar Index settled at 103.417, down 1.518 or -1.46%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) finished at $27.67, down $0.27 or -0.97%.

Following the Fed’s widely expected three-quarters of a point interest rate hike, the SNB unexpectedly raised interest rates for the first time in 14 years.

The BOE also announced another 25 basis point rate hike, its fifth in a row. The BOE’s Monetary Policy Committee voted 6-3 to raise the bank rate to 1.25%, the highest rate in 13 years.

All eyes are now on the Bank of Japan (BOJ) which will make its monetary policy and interest rate decisions early Friday. Some aggressive speculators are betting officials may finally agree to tighten policy.

Daily September U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum is trending lower following the confirmation of Wednesday’s closing price reversal top.

A trade through 105.475 will negate the closing price reversal top and signal a resumption of the uptrend. A move through the main bottom at 101.445 will change the trend to down.

The minor trend is also up. A trade through 102.005 will change the minor trend to down. This will confirm the shift in momentum.

The short-term range is 101.170 to 105.475. On Thursday, traders tested its retracement zone at 103.320 to 102.815.

The major resistance is a long-term Fibonacci level at 107.780. The major support is a long-term 50% level at 101.125.

Daily Swing Chart Technical Forecast

Trader reaction to the short-term 50% level at 103.325 is likely to determine the direction of the September U.S. Dollar Index early Friday.

Bullish Scenario

A sustained move over 103.325 will indicate the presence of buyers. If this creates enough upside momentum then look for a possible surge into a minor pivot at 104.400. Overcoming this level could trigger a surge into the main top at 105.475.

Bearish Scenario

A sustained move under 103.320 will signal the presence of sellers. This could trigger a break into the short-term Fibonacci level at 102.815. A failure to hold this level could trigger a break into the minor bottom at 102.005.

A trade through 102.005 will shift momentum to the downside. This could lead to a test of the support cluster at 101.170 – 101.125.

For a look at all of today’s economic events, check out our economic calendar.

Price of Gold Fundamental Daily Forecast – Needs Lower Yields, Weak Dollar to Sustain Rally

Gold futures are trading higher late in the session on Thursday as investors flocked to bullion on a sharp drop in Treasury yields and a weaker U.S. Dollar.

At 18:36 GMT, August Comex gold futures are at $1850.90, up $31.30 or +1.72%. The SPDR Gold Shares ETF (GLD) is trading $172.41, up $1.64 or +0.96%.

Treasury Yields Fall from Highs

U.S. Treasury yields slipped Thursday, even though the Federal Reserve and central banks around the world indicated they would get more aggressive in their bid to curb rising inflation.

The yield on the benchmark 10-year Treasury note trade 8 basis points lower to 3.311%, after hitting an 11-year high earlier in the week, while the 30-year Treasury bond slid 3 basis points to 3.375%.

The 2-year Treasury rate, which is more sensitive to U.S. monetary policy changes, dropped about 12 basis points to 3.156%.

Lower yields help make non-yielding gold a more attractive asset.

Lower Yields, Stronger Peers Drag Dollar Lower

Traders dumped the U.S. Dollar as falling yields helped make the greenback a less-attractive investment. Although the safe-haven nature of the U.S. Dollar appealed to some traders looking for protection against the sell-off in the stock market, they could not overcome the pressure fueled by the drop in yields and the strong rallies in the Swiss Franc and Japanese Yen.

The Swiss Franc jumped on Thursday against the dollar after the Swiss National Bank raised its policy interest rate for the first time in 15 years.

Meanwhile, the Japanese Yen rallied sharply higher as speculators bet the Bank of Japan would join the rest of the major central banks and announce a change in their ultra-dovish policy.

A weaker U.S. Dollar tends to make gold more appealing to holders of foreign currencies.

Daily August Comex Gold

Technically Speaking…

The main trend is down according to the daily swing chart. A trade through $1882.50 will change the main trend to up.

Holding above the long-term Fibonacci level at $1844.00 will be the key to sustaining the rally. While while taking out the 50% level at $1900.70 could trigger an acceleration into $1938.60 – $1973.20.

For a look at all of today’s economic events, check out our economic calendar.

Risk on the Fed Yo-Yo String – More Ink Split on OPEC Than Oil Delivered – Forex Overview

Global Macro and Stock Markets Analysis

I am not sure of a better way to describe price action than to tell it as risk sentiment is on a Fed rate hike impulse yo-yo string as this morning, at least it is the return of the “bad news is good news, “or maybe it’s just the absence of overly good news. Front end rate hike pressure that had built the day prior on robust economic data immediately eased off after a weaker than expected May ADP employment print, suggesting things are cooling off.

Seemingly, anything that keeps the FED from a more aggressive rate-hiking path appears to be greeted with open arms by equities.

Tech is leading the tape higher. Mega Caps remained well bid and out the risk curve pockets within Growth squeezing higher, despite Vice-Chair and super Fed dove Leal Brainard beating the rate hike drum. Suggesting even the September Fed rate hikes are pretty well digested.

China’s Covid situation is fluid, but it should help further ease supply chain issues/ concerns in the near term. And take the sharp edge off inflation concerns.

One would think this market would be better for sale, given the daily stew is constantly accented with anecdotal doom and gloom. However, some of the bids today may be systematic as the VIX drops below 25 for the 1st time in 6 weeks, which usually gets the machines revving up the buy engines.

However, a pullback in crude would be crucial for any prolonged risk rally, given implications for inflation expectations. It is otherwise hard to see a meaningful Fed shift in September, not to mention the negative consequences for Europe, with the ECB increasingly vocal on hiking aggressively even though the root causes of inflation in Europe are supply-side and mainly energy.

After the Fed’s next two meetings, which will likely see 50bp hikes at each, the Fed is then likely to move into ” assessing conditions mode,” which could become the most significant market mover. Any softening of inflation numbers is expected to be the primary source of volatility across asset classes, leading to higher stocks.

China, Hong Kong, and Taiwan markets will be closed on Friday for the dragon boat festival and reopen Monday. To counter growing economic headwinds, policy supports remain primary catalysts, and that support should speak for itself.

Oil Fundamental Analysis

Again, more ink was spilt on the OPEC narrative than the group will deliver to the market.

The group, led by Saudi Arabia, has been doggedly sticking to its plan for gradual monthly supply increases even after the invasion of Ukraine by Russia.

The increase would be divided proportionally between members in the usual way, delegates said. Countries that have been unable to raise production, such as Angola, Nigeria and most recently Russia, would still be allocated a higher quota. That could mean that the actual supply boosts are smaller than the official figure, as in recent months.

To put it another way, traders think the incremental increase is too small relative to the growing downside supply risks from the EU embargo amid an expected increased demand from China.

Oil trader then donned their rally caps after the EIA report showed crude oil inventories down 5068k bbl last week, which is more significant than the -2100k bbl estimated. Even removing the seasonality effect, the reduction in crude oil stocks was still considerable, about 4.2m bbl.

FOREX

Traders hit the pause button on this week’s USD rally. European yields rose across the board on the back of strong Switzerland CPI ECB’s Villeroy saying inflation is too strong and broad, and even Riksbank’s Jansson saying more rate hikes than planned may be warranted. Though the rates market is trimming probabilities of “central bank puts”, equities reacted resiliently, suggesting stock investors are digesting these hikes well, making for a reasonable USD lower backdrop.

While no one has a crystal ball into the NFP – tomorrow, things can go in the opposite direction on any solid print. It is just the kind of market we are in where stock and bond market interactions are always at the nexus of currency determination.