- The US Dollar falls through the floor with US equities entering correction territory as well.
- Markets are spooked by recession fears after several worrying US data releases last week.
- The US Dollar index falls below 103.00 on Monday after a bad Asian session.
The US Dollar (USD) is picking up speed in its decline on Monday with the US session approaching, after the European session was able to keep the Greenback stable for a few hours. The main trigger is the gruesome performance of the Japanese Nikkei and Topix Indices, which closed down over 12% in blood-red numbers. For the Nikkei, it is the worst performance since 1987, pushing investors and traders into safe-haven bonds. With falling yields, the US Dollar is losing its strength as a batch of weak US economic data and lower yields no longer make the Greenback shine.
On the economic front, the week starts with a big batch of data from the Institute of Supply Management (ISM). Traders will be shaking in their boots as the numbers come out, as another batch of disappointing data could further confirm the recession narrative. Luckily, this week does not hold any further first-tier data points, so dust could settle later in the week.
Daily digest market movers: Data will be ignored
- Markets are in panic mode on Monday after Japanese indices closed down by over 12%. Traders even priced in a 60% chance for an emergency rate cut in August at one point, Bloomberg reported.
- At 13:45 GMT, the final readings of the S&P Global Purchasing Managers Index (PMI) for July will be released:
- Services PMI is expected to come at 56.
- The Composite number is expected to remain stable at 55.
- At 14:00 GMT, the Institute for Supply Management (ISM) will release its numbers for July:
- The Services Employment Index is expected to head to 46.5 from 46.1.
- Services New Orders Index was at 47.3 previously, with no forecast available.
- The Services PMI should head out of contraction to 51 from 48.8.
- Services Paid Index should ease a touch to 55.8 from 56.3.
- Equity markets are falling out of bed on Monday, with the Japanese Nikkei facing its worst performance since 1987. US equities are down with the Nasdaq leading the charge with a 4% decline. European equities are facing milder losses, down 2.5% on average.
- The CME Fedwatch Tool shows a 96.5% chance of a 50 basis points (bps) interest rate cut by the Federal Reserve in September. Another 50 bps cut is expected in November by 78.6%, while a 20.6% chance of just a 25 bps cut is priced in that month.
- The US 10-year benchmark rate trades at a new 52-week low at 3.69%.
US Dollar Index Technical Analysis: No, it is not a fire sale
The US Dollar Index (DXY) has cracked under pressure after the underperforming US economic data releases last week. On Monday, the equity rout continues and drags the Greenback lower. There are no clear support levels nearby, although the Relative Strength Index (RSI) points to the end of the sell off, with losses in Europe and the US for now being contained on the equity markets.
The recovery will be in three tiers, with the first up at 103.18, which was held on Friday though snapped on Monday in the Asian hours. Once the DXY closes above that level, next up is 104.00, which was the support from June. If the DXY can make its way back above that level, the 200-day Simple Moving Average (SMA) at 104.22 is the next resistance level to look out for.
On the downside, the oversold RSI already should refrain the DXY from making more hefty losses. Support nearby is the March 8 low at 102.35. Once through there, pressure will start to build on 102.00 as a big psychological figure, before testing 101.90, which was a pivotal level back in December 2023 and January 2024.
US Dollar Index: Daily Chart
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
